-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ffd3KKX/fvJ1El2dgttqe0N7kVkniU95rn38/IYidxjesaneM3+C+9p08k/hhPQj eAiswttU24tDRliESKuXGg== 0000881791-99-000004.txt : 19990402 0000881791-99-000004.hdr.sgml : 19990402 ACCESSION NUMBER: 0000881791-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USFREIGHTWAYS CORP CENTRAL INDEX KEY: 0000881791 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 363790696 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19791 FILM NUMBER: 99579548 BUSINESS ADDRESS: STREET 1: 9700 HIGGINS RD STE 570 CITY: ROSEMONT STATE: IL ZIP: 60018 BUSINESS PHONE: 8476960200 MAIL ADDRESS: STREET 1: 9700 HIGGINS ROAD SUITE 570 CITY: ROSEMONT STATE: IL ZIP: 60018 FORMER COMPANY: FORMER CONFORMED NAME: TNT FREIGHTWAYS CORP DATE OF NAME CHANGE: 19930328 10-K 1 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO ______________. Commission file number 0-19791 USFREIGHTWAYS CORPORATION (Exact name of registrant as specified in its charter) Delaware 36-3790696 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9700 Higgins Rd., Ste. 570, Rosemont, Il. 60018 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (847) 696-0200 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange of which registered Common Stock $.01 Par Value NASDAQ Preferred Stock Purchase Rights Securities registered pursuant to Section 12(g) of the Act: 6 5/8 % Notes Due May 1, 2000 (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. __X____ Yes________No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K ___. The number of shares of common stock outstanding at March 19, 1999 was 26,334,513. The aggregate market value of the voting stock of the registrant as of March 19, 1999 was approximately $885,871,672. DOCUMENTS INCORPORATED BY REFERENCE 1) 1998 Annual Report to Shareholders for the Fiscal Year Ended December 31, 1998 (Only those portions referenced herein are incorporated in this Form 10-K). 2) Proxy Statement dated March 22, 1999 (Only those portions referenced herein are incorporated in this Form 10-K). Page 2 USFreightays Corporation Form 10-K Fiscal Year Ended December 31, 1998 PART I Item 1. Business Background USFreightways Corporation, (hereafter referred to as the "Company"), operates five regional less than truckload ("LTL") general commodities motor carriers. The main focus of the Company's regional trucking subsidiaries is on overnight and second day delivery of general commodities throughout the United States and into Canada. The Company's Truckload ("TL") subsidiary provides premium regional and national truckload service. The Company's logistics subsidiaries provide solutions to customers' logistics and distribution requirements. The Company's freight forwarding subsidiaries provide domestic and international air and ocean freight service through both exclusive and non-exclusive agents. The Company traces its origins to 1984 when TNT Limited, through its wholly owned subsidiary TNT Transport Group ("Transport Group"), embarked on a strategy to establish, through acquisition, a nationwide network of quality regional LTL carriers. During the same period, the group of businesses that now constitute the Company also grew as a result of internal expansion and increased penetration of existing markets. In April 1991 the Company was incorporated as a holding company for regional trucking companies of Transport Group. During February 1992 the shareholders of the Company sold 19,593,750 shares of common stock through an initial public offering for which the proceeds were paid to Transport Group. In a subsequent transaction, the Company purchased from Transport Group all its remaining shares in the Company. On May 6, 1993 the Company issued, through a public offering, 6 5/8% Notes in the principal amount of $100,000,000 due May 1, 2000. The proceeds from this issuance were, in part, used to repay borrowings under existing revolving lines of credit which were partially used to acquire the common stock from Transport Group. In February 1997, the Company sold 3,105,000 of its shares in a public offering. The net proceeds from the sale, amounting to approximately $69,431,000 were initially used to repay outstanding debt under the Company's revolving credit facility. During 1997, under the purchase method of accounting, the Company acquired all of the outstanding shares of USF Seko Worldwide Inc., an airfreight forwarding company and the general commodities business of Mercury Distribution Carriers, Inc. for an aggregate amount of $26,779,000 of cash and debt incurred. During 1998, under the purchase method of accounting, the Company acquired all of the outstanding shares of Golden Eagle Group, Inc., an international freight forwarding company; Glen Moore Transport, Inc., a truckload freight carrier; Moore & Son Co., a transportation logistics services company; and the general commodities business of Vallerie's Transportation Service, Inc. for a total of $66,379,000 of cash and debt incurred. Following is a table depicting revenue by LTL trucking, TL trucking, Logistics, Freight forwarding and Corporate other segments for each of the most recent three fiscal years: Revenue ($ in millions) Fiscal Year 1996 % 1997 % 1998 % ------ --- ------ --- ------ --- LTL trucking $1,231 92.5 $1,409 90.0 $1,540 83.9 TL trucking 13 0.7 Logistics 86 6.5 106 6.8 130 7.1 Freight forwarding 8 0.6 44 2.8 152 8.3 Corporate and other 6 0.4 6 0.4 0 0.0 ------ ---- ------ ---- ------ ---- Total $1,331 100.0 $1,565 100.0 $1,835 100.0 ------ ----- ------ ----- ------ ----- PAGE 3 Regional LTL Trucking LTL shipments are defined as shipments of less than 10,000 pounds. Typically, LTL carriers transport freight along scheduled routes from multiple shippers to multiple consignees utilizing a network of terminals together with fleets of line-haul and pickup and delivery tractors and trailers. Freight is picked up from customers by local drivers and consolidated for shipment. The freight is then loaded into intercity trailers and transferred by line-haul drivers to the terminal servicing the delivery area. There, the freight is transferred to local trailers and delivered to its destination by local drivers. LTL operators are generally categorized as either regional, interregional or long-haul carriers, depending on the distance freight travels from pickup to final delivery. Regional carriers usually have average lengths of haul of 500 miles or less and tend to provide either overnight or second day service. Regional LTL carriers usually are able to load freight for direct transport to a destination terminal, thereby avoiding the costly and time-consuming use of breakbulk terminals (where freight is rehandled and reloaded to its ultimate destination). In contrast, long-haul LTL carriers (average lengths of haul in excess of 1,000 miles) operate networks of breakbulk and satellite terminals (hub-spoke systems) and rely heavily on interim handling of freight. Interregional carriers (500 to 1,000 miles per average haul) also rely on breakbulk terminals but to a lesser degree than long-haul carriers. Regional LTL carriers, including the Company's trucking subsidiaries, principally compete against other regional LTL carriers. To a lesser extent, they compete against interregional and long-haul LTL carriers. To an even lesser degree, regional LTL transporters compete against truckload carriers, overnight package companies, railroads and airlines. Significant barriers to entry into the regional LTL market exist as a result of the substantial capital requirements for terminals and revenue equipment and the need for a large, well-coordinated and skilled work force. In the competitive environment of each of the Company's trucking subsidiaries, most LTL carriers have adopted discounting programs that severely reduce prices paid by some shippers. Additionally, when new LTL competitors enter a geographic region, they often utilize discounted prices to lure customers away from the Company's trucking subsidiaries. Such attempts to gain market share through price reduction programs exert downward pressure on the industry's price structure and profit margins and have caused many LTL carriers to cease operations. The LTL Trucking Subsidiaries The following is a brief description of the Company's LTL regional trucking subsidiaries. Statistical information for subsidiary's operations is reported in the Company's 1998 Annual Report to the Shareholders, and is incorporated by reference in this Form 10-K as page F21 of Exhibit 13. USF Holland is the largest of the Company's operating subsidiaries, transporting LTL shipments interstate throughout the central United States and into the Southeast. USF Holland uses predominantly single 48 foot trailers. The average length of line-haul in the year ended December 31, 1998 was approximately 390 miles. USF Red Star operates in the eastern United States, as well as to and from eastern Canada. USF Red Star uses a combination of single and double trailers. The average length of line-haul in the year ended December 31, 1998 was approximately 292 miles. USF Red Star operates in an environment characterized by intense price competition. USF Bestway operates throughout the southwest region of the United States from Texas to California. USF Bestway uses double trailers in its operations. For the year ended December 31, 1998 the average length of line-haul for USF Bestway was approximately 420 miles. USF Reddaway provides LTL carriage along the I-5 corridor from California to Washington, throughout the northwest United States and into western Canada and Alaska. The average length of line-haul for the year ended December 31, 1998 was approximately 607 miles. USF Reddaway operates double trailers and, where possible, triple trailer combinations. USF Dugan provides service to the Plains states and into the southern states from Texas to Florida. USF Dugan operates with double and triple trailers, and the average length of line-haul for the year ended December 31, 1998 was approximately 539 miles. PAGE 4 Truckload (TL) Trucking TL shipments are defined as shipments of 10,000 or more pounds. Typically, TL carriers transport freight along irregular routes from single shippers to single consignees, without the necessity of a network of terminals, together with fleets of line-haul sleeper tractors and trailers. Consolidated full truckload freight is picked up from the customer and delivered to its final destination by either a company long-haul driver or an independent owner- operator that has a leasing agreement with the carrier. TL operators are generally categorized as long-haul carriers and to a lesser degree interregional depending on the distance freight travels from pickup to final delivery. The average length of haul for a TL operator is in excess of 1,000 miles. TL carriers, including the Company's trucking subsidiary, principally compete against other TL carriers and to some extent the railroads. TL carriers generally do not compete against LTL carriers. Barriers to entry into the TL market exist as a result of substantial capital requirements for revenue equipment and the need for a well-coordinated and skilled work force. The work force and revenue equipment requirements, to some degree, can be offset through the leasing of independent contractors that own their equipment. This work force is not as controllable as the company employee work force. In the competitive environment of the Company's TL trucking subsidiary, most TL carriers have adopted discounting programs that severely reduce prices paid by some shippers. Additionally, when new TL competitors enter the business, they often utilize discounted prices to lure customers away from the Company's TL trucking subsidiary. Such attempts to gain market share through price reduction programs exert downward pressure on the industry's price structure and profit margins and have caused TL carriers to cease operations. The TL Trucking Subsidiary The following is a brief description of the Company's TL trucking subsidiary. Statistical information for subsidiary's operations is reported in the Company's 1998 Annual Report to the Shareholders, and is incorporated by reference in this Form 10-K as page F21 of Exhibit 13. Glen Moore is the Company's only TL subsidiary, transporting TL shipments interstate throughout the United States generally from the Mid-Atlantic and Southeast states to the West coast and into the Midwest states. Glen Moore primarily utilizes sleeper line-haul tractors and 53 foot trailers. Glen Moore's average lenght of haul is approximately 1,000 miles. The Logistics Subsidiaries The Company is engaged in business of providing logistics, interregional and distribution services. These activities are conducted through USF Logistics, which provides complete supply chain management services from supplying raw materials to delivering products to customers, USF Logistics (IMC) which provides contract warehousing services and USF Distribution Services which collects and ships components to manufacturers and receives, sorts and moves merchandise from suppliers to retail stores. Freight Forwarding The Company is engaged, through its subsidiaries USF Seko Worldwide and the Golden Eagle Group, in providing domestic and international air and ocean freight service through both exclusive and non-exclusive agents. The Company is also engaged, through its subsidiaries USF Coast Consolidators and USF Caribbean Services, in providing direct freight transportation service from the mainland to all points in Hawaii/ Guam and Puerto Rico, respectively. Terminals for Regional LTL Trucking The Company's 226 terminals are a key element in the operation of its regional trucklines. The terminals vary significantly in size according to the markets served. Sales personnel at each terminal are responsible for soliciting new business. Each terminal maintains a team of dispatchers who communicate with customers and coordinate local pickup and delivery drivers. Terminals also maintain teams of dock workers, line-haul drivers and administrative personnel. The larger terminals also have maintenance facilities and mechanics. Each terminal is directed by a terminal manager who has general supervisory responsibilities and also plays an important role in monitoring costs and service quality. PAGE 5 Revenue Equipment At December 31, 1998 the Company operated 8,121 tractors and 18,690 trailers. Each trucking subsidiary selects its own revenue equipment to suit the conditions prevailing in its region, such as terrain, climate, and average length of line-haul. Tractors and trailers are built to standard specifications and generally are not modified to fit special customer situations. Each trucking subsidiary has a comprehensive preventive maintenance program for its tractors and trailers to minimize equipment downtime and prolong equipment life. Repairs and maintenance are performed regularly at the subsidiaries' facilities and at independent contract maintenance facilities. The Company replaces tractors and trailers based on factors such as age and condition, the market for equipment and improvements in technology and fuel efficiency. At December 31, 1998 the average age of the Company's line-haul tractors was 2.6 years and the average age of its line-haul trailers was 5.9 years. Older line-haul tractors are often assigned to pickup and delivery operations, which are generally operated at lower speeds and over shorter distances, allowing the Company to extend the life of line-haul tractors and improve asset utilization. The average age of the Company's pickup and delivery tractors at December 31, 1998 was 7.4 years. Sales and Marketing Sales personnel as well as senior management at each subsidiary are responsible for soliciting new business and maintaining good customer relations. In addition, the Company maintains a national account sales department consisting of 20 professionals who are assigned major accounts within specified geographic regions of the continental United States. These national account managers solicit business for the regional trucklines from distribution and logistics executives of large shippers. In many cases, targeted corporations maintain centralized control of multiple shipping and receiving locations. Seasonality The Company's results, consistent with the trucking and air freight industry in general, show seasonal patterns with tonnage and revenue declining during the winter months and, to a lesser degree, during vacation periods in the summer. Furthermore, inclement weather in the winter months can further negatively affect the Company's results. Customers The Company is not dependent upon any particular industry and provides services to a wide variety of customers including many large, publicly held companies. During the year ended December 31, 1998 no single customer accounted for more than two percent of the Company's operating revenue and the Company's ten largest customers as a group accounted for approximately nine percent of total operating revenue. Many of the national account customers use more than one of the Company's regional trucklines for their transportation requirements. Cooperation Among Trucklines The Company's subsidiaries cooperate with each other to market and provide services along certain routes running between their regions. In such circumstances, the trucklines jointly price their service and then divide revenue in proportion to the amount of carriage provided by each company or based on predetermined formulae. Information Technology Each of the Company's operating subsidiaries maintains its own management information systems and freight tracking and data processing capabilities. These systems vary in sophistication in accordance with the size of each operation and the demands of its customers. Software systems are shared among the regional trucklines where sharing is efficient and appropriate. PAGE 6 Year 2000 The Company has been and continues to address the universal situation commonly referred to as the "Year 2000 Problem". The "Year 2000 Problem" is related to the inability of certain computer systems, software and embedded technologies to properly recognize and process date-related information surrounding the Year 2000. In 1996, the Company initiated a comprehensive review of its computerized Information Technology (IT)and non-information technology systems to identify systems that could be affected by the Year 2000 problems and has implemented a plan to resolve the identified issues. The Year 2000 issues were analyzed by identifying and assessing all systems,software and embedded technologies and business partners with internal business critical systems given a higher priority. The Company defines a system as business critical if a failure would cause a significant service disruption or could cause a material adverse effect on the Company's operations or financial results. As of December 31, 1998, the Company has modified or replaced 91% of its business critical systems. All business critical systems have been unit tested by IT staff members and many have been through a detailed Year 2000 test plan. Further testing and verification on all systems will continue throughout 1999. The Company has expended approximately $1 million as of December 31, 1998 to ensure Year 2000 compliance. The total cost to ensure Year 2000 compliance is estimated to be less than $2 million. The cost estimate is based on the Company's structure and those subsidiaries it owns at the present time. The acquisition of any additional operating entity may significantly impact the total cost as it has been estimated. The Company expects to have contingency plans developed for business critical systems by July 31, 1999. The contingency plans have been tested or will be tested for plan completeness and accuracy. Should there be any disruptions of business critical systems or critical business partners, the Company expects to be able to continue its operations through telephonic and facsimile communications. Therefore, some contingency plans may require additional labor that may impact the Company's operating costs. The Company has been contacting business partners whose Year 2000 non- compliance could adversely affect the Company's operations, employees, or customers. As a provider of transportation and logistics services, the Company's operations are dependent on telecommunication, financial and utility services provided by several entities. The Company is unaware of any of these entities or of any significant supplier to not be Year 2000 compliant.The Company believes the most likely worst case scenario would be the failure of a material business partner to be Year 2000 compliant. Therefore, the Company will continue to work with and monitor the progress of its partners and formulate a contingency plan when the Company does not believe the business partner will be compliant. The Company's assessment of its Year 2000 issues involves some assumptions. These assumptions revolved primarily around the Year 2000 representation from third parties with which the Company has business relationships, and where the Company has not been able to independently verify these representations. Fuel The motor carrier industry is dependent upon the availability of diesel fuel. Shortages of fuel, increases in fuel costs or fuel taxes, or rationing of petroleum products could have a material adverse effect on the profitability of the Company. The Company maintained a fuel surcharge, which was implemented during Fiscal 1996, throughout most of Fiscal 1997 to partially offset an increase in fuel price. The Company has not experienced any difficulty in maintaining fuel supplies sufficient to support its operations. Fuel prices, during 1998, were generally lower than they have been in the past two years. Regulation In August 1994, two pieces of legislation passed the Congress and were signed into law that greatly affected the trucking industry. The Trucking Industry Regulatory Reform Act ("TIRRA") reduced the ICC's authority over motor carriers by eliminating the tariff-filing requirement for motor common carriers using individually determined rates, classifications, rules or practices. Under TIRRA, motor carriers are still required to provide shippers, if requested, with a copy of the rate, classification, rules or practices of the carrier. Also, Title VI of the Federal Aviation Administration Authorization Act of 1994 ("the 1994 Act") effectively prohibited state economic regulation of all trucking operations for motor carriers. The 1994 Act does allow the states to continue regulation of safety and insurance programs, including carrier inspections. On December 29, 1995, President Clinton signed the Interstate Commerce Commission Termination Act of 1995 ("ICCTA") which abolished the ICC as of January 1, 1996 and transferred its residual functions to the Federal Highway Administration and a newly created Surface Transportation Board within the U. S. Department of Transportation. Congress has prescribed a transition period during which regulations implementing the ICCTA including insurance and safety issues must be promulgated by the Secretary of Transportation. PAGE 7 The trucking industry remains subject to the possibility of regulatory and legislative changes that can influence operating practices and the demands for and the costs of providing services to shippers. Interstate motor carrier operations are subject to safety requirements prescribed by the U.S. Department of Transportation ("DOT"), while such matters as the weight and dimensions of equipment are also subject to Federal and state regulations. Effective April 1, 1992, truck drivers were required to be commercial vehicle licensed in compliance with the DOT, and legislation subjects them to strict drug testing standards. These requirements increase the safety standards for conducting operations, but add administrative costs and have affected the availability of qualified, safety conscious drivers throughout the trucking industry. The Company's freight forwarding subsidiaries' domestic and international air services are not subject to regulation by the Department of Transporation, and the subsidiaries' ocean freight service is subject to the jurisdiction of the Federal Maritime Commission. The Company uses underground storage tanks at certain terminal facilities and maintains a comprehensive policy of testing, upgrading, replacing or eliminating these tanks to protect the environment and comply with various Federal and state laws. Whenever any contamination is detected, the Company takes prompt remedial action to remove the contaminants. Insurance and Safety One of the risk areas in the Company's businesses is cargo loss and damage, bodily injury, property damage and workers' compensation. The Company is effectively self-insured on its significant operations up to $2 million per occurrence for cargo loss and damage, bodily injury and property damage. The Company is also predominantly self-insured for workers' compensation for amounts to $1 million per occurrence. Additionally, the Company insures workers' compensation for amounts in excess of $1 million per occurrence and all other losses in excess of $2 million. Each operating subsidiary employs safety specialists and maintains safety programs designed to meet its specific needs. In addition, the Company employs specialists to perform compliance checks and conduct safety tests throughout the Company's operations. The Company's safety record to date has been good. Employees At December 31, 1998 the Company employed 19,179 persons, of whom 11,668 were drivers, 1,582 were dock workers, and the balance support personnel, including office workers, managers and administrators. Approximately 49 percent of all employees were members of unions. Approximately 88 percent of these union workers were employed by USF Holland or USF Red Star and belonged to the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America (the "IBT"). Members of the IBT at USF Holland and USF Red Star are presently working under the terms of a five-year, industry-wide labor agreement that expires in March 2003. PAGE 8 Item 2. Properties The Company's executive offices are located at 9700 Higgins Road, Suite 570, Rosemont, IL 60018. The Company's 19,500 square foot facility is occupied under a lease terminating in November 2002. Each of the Company's operating subsidiaries also maintains a head office as well as numerous operating facilities. Of the 225 regional LTL trucking terminal facilities used by the Company as of December, 1998, 96 were owned and 129 were leased. These facilities range in size according to the markets served. The Company has not experienced and does not anticipate difficulties in renewing existing leases on favorable terms or obtaining new facilities as and when required. Item 3. Legal Proceedings The Company is a party to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, (CERCLA). The Company has been made a party to these proceedings as an alleged generator of waste disposed of at hazardous waste disposal sites. In each case, the Government alleges that the parties are jointly and severally liable for the cleanup costs. Although joint and several liability is alleged, these proceedings are frequently resolved on the basis of the quantity of waste disposed of at the site by the generator. The Company's potential liability varies greatly from site to site. For some sites the potential liability is de minimis and for others the costs of cleanup have not yet been determined. While it is not feasible to predict or determine the outcome of these proceedings or similar proceedings brought by state agencies or private litigants, in the opinion of management, the ultimate recovery or liability, if any, resulting from such litigation, individually or in the aggregate, will not materially adversely affect the Company's financial condition or results of operations and, to the Company's best knowledge, such liability, if any, will represent less than 1% of its revenues. Steven Mark Whitworth v. TNT Bestway Transportation, Inc. n/k/a TNT Bestway Inc. and William Orr, Case No. 96-3935-A, 14th Judicial District Court, Dallas County, Texas. On or about November 1, 1996, a judgment was entered against the Company's subsidiary, USF Bestway Inc. for $3,500,000 in actual damages and $1,750,000 in attorneys fees together with court costs and interest. USF Bestway Inc. has appealed the judgment to the Dallas Court of Appeals. The appeal has been scheduled for March 10, 1999 Management of the Company believes that it has good grounds for obtaining a reversal of the judgment on appeal because it believes, among other reasons, that the judgment entered on the basis of the procedural technicality of counsel's failure to comply with the requirements of Texas law concerning the signature of pleadings by counsel will not be sustained by a reviewing court. The Company further believes the judgment will be vacated and the matter remanded for a trial on the merits and that, in any event, the judgment, if sustained, will not have a material adverse effect on the Company's financial condition. In the event the judgment is sustained on appeal, management of the Company's subsidiary, USF Bestway Inc. intends to pursue potential causes of action against all appropriate parties. Also, the Company is involved in other litigation arising in the ordinary course of business, primarily involving claims for bodily injuries and property damages. The Company maintains insurance coverage to insure against these types of claims. Accordingly, in the opinion of management, the ultimate recovery or liability, if any, resulting from such litigation, individually or in the aggregate, will not materially adversely affect the Company's financial condition or results of operations. PAGE 9 PART II Item 5. Market for the Company's Common Stock and related Stockholder Matters The Company's common stock trades on The NASDAQ Stock Market under the symbol: USFC. On March 9, 1999 there were approximately 12,000 beneficial holders of the Company's common stock. For the high and low sales prices for the common stock for each full calendar quarterly period for fiscal year 1997 and 1998, see page F19 of the Company's Annual Report to the Shareholders - Financial Statements (incorporated by reference under Item 14 herein). Since July 2, 1992, the Company has paid a quarterly dividend of $.093333 per share. Although it is the present intention of the Company to continue paying quarterly dividends, the timing, amount and form of future dividends will be determined by the board of directors and will depend, among other things, on the Company's results of operations, financial condition, cash requirements, certain legal requirements and other factors deemed relevant by the board of directors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" (incorporated by reference under Item 14 herein). Item 6. Selected Financial Data The information set forth under the caption "Selected Consolidated Financial Data" on page F20 of the Company's Annual Report to the Shareholders Financial Statements for the year ended December 31, 1998, is incorporated by reference under Item 14 herein. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages F2 through F5 of the Company's Annual Report to the Shareholders - Financial Statements for the year ended December 31, 1998, is incorporated by reference under Item 14 herein. Item 8. Financial Statements and Supplementary Data The Financial Statements and Supplementary Data Appearing on pages F7 through F19 of the Company's Annual Report to the Shareholders - Financial Statements for the year ended December 31, 1998, are incorporated by reference under Item 14 herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure KPMG LLP was previously engaged as the principal accountant to audit the Company's financial statements for the Company's 1996 fiscal year. On September 18, 1997, their appointment as principal accountants was terminated. In the year ended December 28, 1996, and during the subsequent interim period through September 18, 1997, KPMG LLP's reports on the financial statements of the Company did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The decision to terminate the relationship with the accountants was approved by the Company's Audit Committee on September 18, 1997. There were no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure during the Company's last two fiscal years. The Company requested KPMG LLP to furnish a letter addressed to the Commission stating whether it agrees with the statements made by the Company, and, if not, stating the respects in which it does not agree. A letter from KPMG LLP stating its agreement with the statements made by the Company was included as Exhibit 16 in a current Report on Form 8-K dated September 18, 1997. On September 18, 1997, the Company engaged Arthur Andersen LLP as its principal accountant to audit the Company's financial statements for the fiscal year ending January 3, 1998. The Company requested Arthur Andersen LLP to review the disclosure required in a Report on Form 8-K dated September 18, 1997 before it was filed with the Commission and provided Arthur Andersen LLP with the opportunity to furnish the Company with a letter addressed to the Commission containing any new information, clarification of the Company's expressions of its views, or the respects to which it did not agree with the statements made in the Report on Form 8-K dated September 18, 1997. Before the Company filed the current Report on Form 8-K dated September 18, 1997, Arthur Andersen LLP informed the Company that it had reviewed the disclosures and did not intend and was not required to furnish the Company with such letter. PAGE 10 PART III Item 10. Directors and Executive Officers of the Company The information for directors is reported in the Company's definitive proxy statement filed pursuant to Regulation 14A, and is incorporated by reference. The following table sets forth certain information as of December 31, 1998 concerning the registrant's executive officers: Name Age Position John Campbell Carruth 68 Chairman and Chief Executive Officer and Director Robert V. Fasso 45 President-RegionalCarrier Group Christopher L. Ellis 53 Senior Vice President, Finance & CFO John Campbell Carruth, 68, was appointed as the Company's Chief Executive Officer and President in June of 1991 and Chairman in January of 1998, and has been a director of the Company since December of 1991. Robert V. Fasso, 45, was appointed as the Company's President-Regional Carrier Group in September 1997. Since July 1993, Mr. Fasso has been President and CEO of the Company's subsidiary USF Bestway Inc. Prior to that date, he was with Yellow Freight System. Christopher L. Ellis, 53, has been Senior Vice President, Finance and Chief Financial Officer of the Company since June 1991. Item 11. Executive Compensation This information is reported in the Company's definitive proxy statement entitled "Management Compensation" and "Compensation Committee Interlocks and Insider Participation" respectively which will be filed pursuant to Regulation 14A, and is incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management This information is reported in the Company's definitive proxy statement entitled "Security Ownership of Principal Holders and Management" which will be filed pursuant to Regulation 14A, and is incorporated by reference. Item 13. Certain Relationships and Related Party Transactions This information is reported in the Company's definitive proxy statement entitled "Certain Relationships and Related Transactions" which will be filed pursuant to Regulation 14A, and is incorporated by reference. PART IV Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K (a) (1) Financial Statements The following consolidated financial statements appearing in the 1998 Annual Report to the Shareholders is incorporated by reference in this Annual Report on Form 10-K as Exhibit 13: Page Numbers of Exhibit 13 F 20 Selected Consolidated Financial Data F 2-5 Management's Discussion and Analysis of Financial Condition and Results of Operations F 6 Independent Auditors' Report F 7-10 Consolidated Financial Statements F 11-19 Notes to Consolidated Financial Statements PAGE 11 (2) Financial Statement Schedule: Independent Auditors' Report The Board of Directors and Stockholders, USFreightways Corporation: We have audited the accompanying consolidated balance sheets of USFreightways Corporation and subsidiaries as of December 31, 1998 and January 3, 1998 and the related consolidated statements of operations, stockholders' equity, and cash flows for the two years ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USFreightways Corporation and subsidiaries as of December 31, 1998 and January 3, 1998 and the results of their operations and their cash flows for the two years ended December 31, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP, Chicago, Illinois, January 19, 1999 The Board of Directors and Stockholders, USFreightways Corporation: We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows for the year ended December 28, 1996 of USFreightways Corporation and subsidiaries. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USFreightways Corporation and subsidiaries as of December 28, 1996 and the results of operations and cash flows for the year ended December 28, 1996, in conformity with generally accepted accounting principles. KPMG LLP, Chicago, Illinois, January 22, 1997 Schedule II - Valuation and Qualifying Accounts USFreightways Corporation Three Years ended December 31, 1998 (dollars in thousands)
Additions ------------------------- Description Balance at Charges to Charged to Deductions(1) Balance at Beginning Costs and Other End of of Period Expenses Accounts Period - ----------- --------- ---------- ----------- ---------- --------- Fiscal year ended December 28,1996 Accounts receivable allowances $5,606 $4,868 $0 $3,288 $7,186 for revenue adjusmtents and doubtful accounts Fiscal year ended January 3, 1998 Accounts receivable allowances $7,186 $6,717 $0 $3,836 $10,067 for revenue adjusmtents and doubtful accounts Fiscal year ended December 31, 1998 Accounts receivable allowances $10,067 $6,367 $0 $5,275 $11,159 for revenue adjusmtents and doubtful accounts (1) Primarily uncollectible accounts written off net of recoveries.
PAGE 12 (3) Exhibits Exhibit Document Number Description 3(a) Amended and Restated Certificate of Incorporation of USFreightways Corporation (incorporated by reference from Exhibit 3.1 to USFreightways Corporation Transition Report on Form 10-K, from June 29, 1991 to December 28, 1991); Certificate of Designation for Series A Junior Participating Cumulative Preferred Stock (incorporated by reference from Exhibit 3(a) to USFreightways Corporation Annual Report on Form 10-K for the year ended January 1, 1994); Certificate of Amendment of Restated Certificate of Incorporation of USFreightways Corporation (incorporated by reference from Exhibit 3(i) to USFreightways Corporation Report on Form 10-Q for the quarter ended June 29, 1996). 3(b) Bylaws of USFreightways Corporation, as restated January 23, 1998 (incorporated by reference from Exhibit 3(b) to USFreightways Corporation Annual Report on Form 10-K for the year ended January 3, 1998). 4(a) Form of Rights Agreement, dated as of February 4, 1994, between USFreightways Corporation and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to USFreightways Corporation's registration statement on Form 8-A filed with the Securities and Exchange Commission on March 18, 1994). 4(b) Form of Indenture, dated as of May 1, 1993 between USFreightways Corporation and Harris Trust and Savings Bank, as Trustee (incorporated by reference from USFreightways Corporation's Registration Statement on Form S-1, filed on April 16, 1993, Registration No. 33-61134). 10(d) USFreightways Stock Option Plan (incorporated by reference from Exhibit 10.18 to USFreightways Corporation Transition Report on Form 10-K from June 29, 1991 to December 28, 1991). 10(e) Agreement dated March 5, 1993 Supplementing the Tax Indemnification Agreement between USFreightways Corporation and TNT Transport Group (incorporated by reference from Exhibit 10 to USFreightways Corporation Annual Report on Form 10-K for the year ended January 2, 1993). 10(f) Stock Option Plan for Non-Employee Directors dated October 29, 1993 (incorporated by reference from Exhibit 10(f) to USFreightways Corporation Annual Report on Form 10-K for the year ended January 1, 1994). 10(g) Employment Agreement of Christopher L. Ellis dated December 16, 1991 (incorporated by reference from Exhibit 10(g) to USFreightways Corporation Annual Report on Form 10-K for the year ended January 1, 1994). 10(i) Form of Election of Deferral (incorporated by reference from Exhibit 10(h) to USFreightways Corporation Annual Report on Form 10-K for the year ended December 31, 1994). 10(j) USFreightways Long-Term Incentive Plan (incorporated by reference from Exhibit 10.1 to USFreightways Corporation Report on Form 10-Q for the quarter ended March 29, 1997). 10(k) Stock Option Plan for Non-Employee Directors amended and restated as of January 1, 1997 (incorporated by reference from Exhibit 3(ii) to USFreightways Corporation Report on Form 10-Q for the quarter ended March 29, 1997). PAGE 13 Exhibit Document Number Description 10(l) Employment Agreement of Robert V. Fasso dated December 12, 1997 (incorporated be reference from Exhibit 10(l) to USFreightways Corporation Annual Report on Form 10-K for the year ended January 3, 1998). 10(m) $200,000,000 Credit Agreement dated as of November 26, 1997 among USFreightways Corporation, the banks named therein and NBD Bank, N. A. as agent (incorporated by reference from Exhibit 10(l) to USFreightways Corporation Annual Report on Form 10-K for the year ended January 3, 1998). 10(n) Form of Irrevocable Guaranty and Indemnity relating to the Credit Agreement described in Exhibit 10(m) (incorporated by reference from Exhibit 10(l) to USFreightways Corporation Annual Report on Form 10-K for the year ended January 3, 1998). 10(p) Restricted Stock Agreement with John Campbell Carruth dated April 27, 1998 (incorporated by reference from Exhibit 10.1 to USFreightways Corporation Report on Form 10-Q for the quarter ended July 4, 1998). 10(q) USFreightways Corporation Non-Qualified Deferred Compensation Plan (filed with this Annual Report on Form 10-K). 13 1998 USFreightways Corporation Annual Report to Shareholders. 21 Subsidiaries of USFreightways Corporation (incorporated by reference from the 1998 USFreightways Annual Report to Shareholders). 23 Consent of Arthur Anderson LLP. 24 Powers of Attorney 27 Financial Data Schedule Exhibits 2, 9, 11, 12, 16, 18, 22 and 28 are not applicable to this filing. (b) Reports on Form 8-K 1. On October 6, 1998 and November 3, 1998, the Company filed a Current Report on Form 8-K. PAGE 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated March 29, 1999. USFREIGHTWAYS CORPORATION By: /s/Christopher L. Ellis -------------------- Christopher L. Ellis Senior Vice President, Finance and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date /s/ John Campbell Carruth * Chairman of the Board March 29, 1999 Chief Executive Officer and Director - --------------------- John Campbell Carruth /s/ Morley Koffman * Director March 29, 1999 - -------------------- Morley Koffman /s/ William N. Weaver, Jr. * Director March 29, 1999 - ---------------------------- William N. Weaver, Jr. /s/ Robert P. Neuschel * Director March 29, 1999 - ------------------------ Robert P. Neuschel /s/ Neil A. Springer * Director March 29, 1999 - ---------------------- Neil A. Springer /s/ Robert V. Delaney * Director March 29, 1999 - ----------------------- Robert V. Delaney /s/ John W. Puth * Director March 29, 1999 - ------------------ John W. Puth /s/ Anthony J. Paoni * Director March 29, 1999 - ---------------------- Anthony J. Paoni /s/ Christopher L. Ellis Chief Financial Officer March 29, 1999 - ------------------------ Christopher L. Ellis /s/ Robert S. Owen Controller and Principal March 29, 1999 Accounting Officer - ------------------ Robert S. Owen /s/ Christopher L. Ellis * By: Christopher L. Ellis Attorney-in-Fact PAGE 15 EXHIBIT 10(q) USFreightways Corporation USFREIGHTWAYS CORPORATION NON-QUALIFIED DEFERRED COMPENSATION PLAN Effective as of December 1, 1998 ARTICLE 1. ESTABLISHMENT AND PURPOSE 1 Section 1.1. Establishment 1 Section 1.2. Purpose 1 ARTICLE 2. DEFINITIONS 1 Section 2.1. Definitions 1 Section 2.2. Gender and Number 3 ARTICLE 3. ELIGIBILITY AND PARTICIPATION 3 Section 3.1. Eligibility 3 Section 3.2. Limitation on Participation 3 Section 3.3. Removal from Participation3 ARTICLE 4. DEFERRAL ELECTIONS 3 Section 4.1. Participant Contributions 3 Section 4.2. Submission of Deferral Election Forms 3 Section 4.3. Deferral Period 4 Section 4.4. Nullification of Deferral Elections4 ARTICLE 5. COMPANY CONTRIBUTIONS 4 ARTICLE 6. STATUS OF DEFERRED AMOUNTS4 Section 6.1. Account 4 Section 6.2. Investment 4 Section 6.3. Report of Accrued Balance 5 Section 6.4. Treatment under Other Employee Benefit Plans 5 ARTICLE 7. DISTRIBUTIONS 5 Section 7.1. Timing and Form of Distributions 5 Section 7.2. Hardship Withdrawals 5 Section 7.3. Designation of Beneficiary6 Section 7.4. Claims Procedure 6 ARTICLE 8. PROVISIONS RELATING TO PARTICIPATION 7 Section 8.1. Extent of Rights Under Plan 7 Section 8.2. Funding 7 Section 8.3. Extent to Which Other Parties are Bound by Plan 7 Section 8.4. Payment of Taxes 7 ARTICLE 9. ADMINISTRATION AND FINANCES 7 Section 9.1. Administration 7 Section 9.2. Powers of Committee 7 Section 9.3. Actions of the Committee 7 Section 9.4. Delegation 8 Section 9.5. Indemnification 8 Section 9.6. Reports and Records 8 Section 9.7. Information to be Furnished to Committee 8 ARTICLE 10. AMENDMENTS AND TERMINATION8 Section 10.1. Amendments 8 Section 10.2. Termination 8 ARTICLE 11. MISCELLANEOUS 9 Section 11.1. No Guarantee of Employment9 Section 11.2. Non-Alienation 9 Section 11.3. Severability 9 Section 11.4. Applicable Law 9 Section 11.5 Prior Deferral Plans 9 PAGE 16 USFREIGHTWAYS CORPORATION NON-QUALIFIED DEFERRED COMPENSATION PLAN ARTICLE 1. ESTABLISHMENT AND PURPOSE Section 1.1. Establishment. USFreightways Corporation desires to establish a non-qualified deferred compensation plan for the benefit of a select group of the Company's management or highly compensated employees. This plan is known as the USFreightways Corporation Non-Qualified Deferred Compensation Plan (the "Plan"). Section 1.2. Purpose. The purpose of the Plan is to enhance the ability of the Company to attract and retain qualified management personnel by providing Participants with (a) the opportunity to defer a portion of their Compensation that cannot be deferred under the terms of the USF Employees' 401K Retirement Plan ("the 401K Plan") and (b) the opportunity to defer a portion of their annual Bonus Compensation. The Plan is to be treated for all purposes of federal income tax law as an unfunded and non-qualified deferred compensation plan. ARTICLE 2. DEFINITIONS Section 2.1. Definitions. Whenever used in the Plan, the following words and phrases shall have the meanings set forth below unless the context plainly requires a different meaning. When the defined meaning is intended, the term is capitalized. (a) "Account" means the deferred compensation account for each Participant established by the Administrator pursuant to Section 6.1. (b) "Accrued Balance" means the amount of each Participant's Deferred Compensation that is credited to his or her Account, after adjustment under Article 6 for interest, earnings and losses. (c) "Administrator" means the individual or entity selected by the Committee to carry out the administration of the Plan. If no such individual or entity is selected, the Committee shall serve as the Administrator. (d) "Board of Directors" means the Board of Directors of USFreightways Corporation. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" means that Committee designated by the Board of Directors of the Company to administer the Plan. If no such Committee is appointed, the Board of Directors shall serve as the Committee. (g) "Company" means USFreightways Corporation and its wholly owned subsidiaries, including any successor or successors. (h) "Company Contributions" means the contributions made by the Company, if any, described in Article 5. (i) "Compensation" means the items of compensation subject to deferral pursuant to the provisions of Article 4 herein. ------------ (j) "Deferred Compensation" means the amount of Compensation not yet earned, as designated in the Enrollment Election Form, which the Participant and the Company mutually agree shall be deferred in accordance with the provisions of the Plan, and which may be provided either by the Participant through salary reduction or by the Company through Employer Contributions. (k) "Distribution Election" means the election designated by the Participants as to the timing and form of distribution of Deferred Compensation in accordance with Section 7.1. This election is incorporated into the Enrollment Election Form. (l) "Effective Date" means December 1, 1998, the date as of which eligible employees may commence participation in the Plan. (m) "Enrollment Election Form" means the form designated by the Committee for use by Participants to make annual deferrals of Compensation under Article 4. This form is included as Appendix A. This form may be changed at any time by the Administrator with the approval of the Committee. (n) "Participant" means any officer or other key employee of the Company who is eligible to participate in the Plan, pursuant to Section 3.1. (o) "Plan" means this USFreightways Corporation Non-Qualified Deferred Compensation Plan. PAGE 17 (p) "Plan Year" means the initial Plan Year beginning December 1, 1998 and ending December 31, 1998 and each subsequent twelve-month period beginning January 1 and ending December 31. (q) "Unforeseeable Emergency" means an unanticipated emergency that is caused by an event beyond the control of the Participant and that would result in severe financial hardship to the individual if early withdrawal were not permitted. The Committee shall determine, in its sole discretion, whether an Unforeseeable Emergency exists. Section 2.2. Gender and Number. Except as otherwise indicated by context, masculine terminology also includes the feminine, and terms used in the singular may also include the plural. ARTICLE 3. ELIGIBILITY AND PARTICIPATION Section 3.1. Eligibility. Participation in the Plan shall be limited to officers and other key employees of the Company who comprise a "select group of management or highly compensated employees" (as that phrase is used under Department of Labor Regulation Section 2520.104-23). Section 3.2. Limitation on Participation. The Committee, in its sole discretion, may change the definition of who generally qualifies as a Participant, including any minimum or maximum deferral amounts that must be made by a Participant in any Plan Year. Any such change shall be effective for the following Plan Year, as designated by the Committee. Section 3.3. Removal from Participation. Upon the direction of the Committee, a Participant may be removed from participating in the Plan on a prospective basis for any reason. ARTICLE 4. DEFERRAL ELECTIONS Section 4.1. Participant Contributions. Prior to the beginning of each Plan Year, a Participant may elect to reduce the amount of his or her Compensation which would otherwise be earned and payable in or with respect to the following Plan Year by filing an Enrollment Election Form with the Administrator. For the purposes of this Plan, "Compensation" means base salary and bonus compensation payable under the terms of the Company's incentive compensation program. The Participant may elect to defer a specified percentage or specified dollar amount of his or her Compensation and may direct the deferral of base salary only, bonus compensation only, or both base salary and bonus compensation. A deferral shall apply only with respect to bonus compensation relating to services performed during the Plan Year beginning after the date on which the Enrollment Election Form is filed with the Administrator; provided, however, that any initial Enrollment Election Form completed by a Participant with respect to his or her first Plan Year of participation may apply to Bonus Compensation payable with respect to services performed during the calendar year in which such initial Enrollment Election Form is completed. Section 4.2. Submission of Enrollment Election Forms. Each Participant who wishes to participate in the Plan must submit the appropriate Enrollment Election Form to the Administrator no later than 15 days prior to the last day of the Plan Year preceding the Plan Year with respect to which the Participant wishes to defer amounts under this Plan. Section 4.3. Deferral Period. The deferral period shall begin on the first day of the Plan Year with respect to which the Enrollment Election Form is filed. The deferral period for all deferrals shall end on the date the Participant's employment with the Company is terminated for any reason, including death, disability or retirement; provided, however, that if the termination of employment is for reason of retirement, the deferral period shall end no earlier than the end of the Plan Year in which the Participant reaches age 55. Section 4.4. Nullification of Deferral Elections. Notwithstanding the submission of Deferral Elections pursuant to this Article, the Committee may nullify such elections to alleviate demonstrated financial hardship, or because of changes in tax laws. The Company or the Committee shall determine, in its discretion and on a uniform and nondiscriminatory basis, whether a financial hardship exists. PAGE 18 ARTICLE 5. COMPANY CONTRIBUTIONS The Company, at the discretion of its Board of Directors, may make contributions to the Account of each of the Participants in the Plan. Such Company Contributions, when combined with the Company Contributions made to the Participant's Account under the 401K Retirement Plan, shall total a maximum of 3 percent of a Participant's Compensation. Employer Contributions, if made, shall be treated as deferred amounts under Articles 4 and 6 and shall be fully vested and nonforfeitable at all times. ARTICLE 6. STATUS OF DEFERRED AMOUNTS Section 6.1. Account. The Administrator shall establish an Account for each Participant's Deferred Compensation, to reflect accurately the share of the Participant under the Plan. Amounts deferred under Article 4 and any amounts contributed under Article 5 shall be credited to the Account of the Participant no later than the 15th of the month following the month in which such amounts would have been payable to the Participant if he or she had not made the Deferral Election. Section 6.2. Investment. Amounts credited to Participant's Account under the Plan shall be adjusted in accordance with the performance of one or more investment alternatives to be selected from time to time by the Company (in which case losses may also occur). In making the choice of which investment alternative or alternatives will be used to determine the investment performance of a Participant's Account, the Company may in its discretion take into account the investment recommendations, if any, made by the Participant. Such investment recommendations shall be made by the Participant on a Enrollment Election Form, which is attached as Appendix A. Title to and beneficial ownership of any actual investments of the Company (whether or not held in trust and whether or not invested in one or more of the above-described investment alternatives) shall at all times remain in the Company and shall constitute general assets of the Company, subject only to claims of its general creditors. A Participant or his or her beneficiary shall not under any circumstances acquire any proprietary or beneficial interest in any asset of the Company by virtue of such Participant's participation in the Plan. Interest, gains and/or losses shall be credited to Participants' Accounts quarterly. Participants' investment recommendations (which, as noted above, may but need not be followed by the Company) may be revised as often as quarterly both as to existing balances and as to future contributions. Such election changes shall be made on the form made available by the Administrator for that purpose and shall be delivered to the Administrator no later than 10 days prior to the first day of the quarter for which such change is to be effective. Section 6.3. Report of Accrued Balance. The Administrator shall advise each Participant of his or her Accrued Balance at least annually following the end of each Plan Year (on a date or dates to be determined by the Administrator). Section 6.4. Treatment under Other Employee Benefit Plans. It is intended that the amounts deferred by a Participant under Article 4 shall at the earliest time permitted by applicable law be includable in determining benefits under any pay-related employee benefit plans of the Company as well as under any tax-qualified retirement plans (to the extent permitted in such plans), except to the extent that such inclusion in any such pay-related or tax-qualified plan would adversely affect the tax-favored status of that plan or the tax-deferred status of Compensation deferred under the Plan. ARTICLE 7. DISTRIBUTIONS Section 7.1. Timing and Form of Distributions. As soon as administratively practicable after the expiration of the deferral period described in Section 4.3, the Company shall commence payment to the Participant of his or her Accrued Balance. The Participant's Accrued Balance shall be paid in a lump sum or in equal annual installments as designated by the Participant on the Enrollment Election Form. As soon as practicable following a Participant's death, his or her entire Accrued Balance shall be paid to his or her designated beneficiary or beneficiaries in a lump sum or installments in accordance with the Participant's existing election. In the event a Participant dies while receiving installment distributions hereunder, such Participant's beneficiary or beneficiaries shall receive the remainder of such installment payments; provided, however, that the Committee in its sole discretion may determine that such beneficiary or beneficiaries shall receive a lump sum payment equal to the present value of the Participant's remaining installment payments as of the date of his or her death. PAGE 19 Section 7.2. Hardship Withdrawals. A Participant may at any time apply in writing to the Committee for a single-sum distribution of that portion of such Participant's Accrued Balance necessary to relieve an immediate financial need resulting from an Unforeseeable Emergency. Whether, and the extent to which, the Participant has incurred an Unforeseeable Emergency shall be determined by the Committee in its sole discretion. The minimum hardship withdrawal shall be $5,000, and the maximum hardship withdrawal shall be the amount necessary to relieve the immediate financial need resulting from the Unforeseeable Emergency. At the discretion of the Committee, the amount of the hardship withdrawal may be increased to account for any income taxes that will be imposed upon the Participant as a result of the withdrawal. Section 7.3. Designation of Beneficiary. Each Participant shall have the right to designate one or more individuals or entities as beneficiaries in the event of the Participant's death. The Participant may also designate one or more contingent beneficiaries. To become effective, these designations must be made by the Participant on the appropriate Beneficiary Designation form (attached as Appendix B) and must be filed with the Administrator in order to become effective. If no designated beneficiary survives the Participant, then the beneficiary shall be the Participant's estate. Section 7.4. Claims Procedure. If a Participant or his or her beneficiary (hereinafter referred to as a "Claimant") is denied all or a portion of an expected benefit under the Plan for any reason, he or she may file a claim with the Administrator. The Administrator shall notify the Claimant within 90 days after receipt of the claim (or within 180 days if special circumstances apply) of allowance or denial of the claim. If the claim for benefits is denied, in whole or in part, the Claimant will receive a written explanation of: (a) The specific reasons for the denial; (b) The specific references to provisions of the Plan document that support those reasons; (c) Any additional information that must be provided to improve the claim and the reasons why that information is necessary; and (d) The procedures that are available for a further review of the claim. A Claimant is entitled to request a review of any denial of his or her claim by the Committee. The request for review must be submitted within 60 days of receipt of the denial. Absent a request for review within the 60-day period, the claim shall be deemed to be conclusively denied. The Claimant or his or her representatives shall be entitled to review all pertinent documents and to submit issues and comments in writing as part of any request for review. The Committee will conduct a full and fair review of the claim and will notify the Claimant of the decision within 60 days (or 120 days if special circumstances apply). The decision must be in writing and will include the specific reasons and references to Plan provisions on which the decision is based. The Committee has the exclusive right and discretion to interpret the provisions of the Plan, and the entitlement to benefits, and its decision is conclusive and final and not subject to further review to the maximum extent permitted by law. ARTICLE 8. PROVISIONS RELATING TO PARTICIPATION Section 8.1. Extent of Rights Under Plan. Except as to amounts actually distributed under the Plan, no Participant and no person claiming under or through a Participant shall have any right or interest in the Plan, in any Account (whether with respect to assets set aside in trust or otherwise) or in the continuance of the Plan. Section 8.2. Funding. No funds shall be segregated or earmarked for any current or former Participant, beneficiary or other person. However, the Company may establish one or more grantor trusts of the type referred to as a "Rabbi Trust" in respect of its obligations under the Plan. No current or former Participant, beneficiary or other person, individually or as a member of a group, shall have any right, title or interest in any Account, any fund, any specific sum of money, any grantor trust or in any asset which may be acquired by the Company in respect of its obligations under the Plan (other than as a general creditor of the Company with an unsecured claim against the Company's general assets). Section 8.3. Extent to Which Other Parties are Bound by Plan. The Plan shall be binding upon and shall inure to the benefit of the Company, including its successors and assigns, and the Participants and their heirs, administrators and personal representatives. In the event the USFreightways Corporation becomes party to any merger, consolidation, or reorganization, this Plan shall remain in full force and effect as an obligation of the USFreightways Corporation or its successors in interest. Section 8.4. Payment of Taxes. The Company shall to the extent required by law withhold Federal, state and local taxes (including but not limited to income taxes and taxes under the Federal Insurance Contributions Act) with respect to any distribution from the Plan to any Participant or beneficiary. To the extent permitted by law, a Participant may elect a specified federal income tax withholding rate (i.e., above the minimum applicable withholding rate). PAGE 20 ARTICLE 9. ADMINISTRATION AND FINANCES Section 9.1. Administration. The Plan shall be administered by the Committee and the Administrator (to the extent administrative duties are assigned by the Committee to the Administrator) and, as applicable, by representatives of the Company. Section 9.2. Powers of Committee. The Committee shall have all powers necessary to administer the Plan, including, without limitation, the power to interpret the provisions of the Plan and decide all questions of eligibility (within its complete discretion), to establish rules and forms for the administration of the Plan and to appoint the Administrator and any other individuals to assist in the administration of the Plan. Section 9.3. Actions of the Committee. All determinations, interpretations, rules and decisions of the Committee shall be conclusive and binding upon all persons having or claiming to have any interest or right under the Plan. Section 9.4. Delegation. The Committee shall have the power to delegate specific duties and responsibilities to officers or other employees of the Company or to other individuals or entities, including the Administrator. Any delegation may be rescinded by the Committee at any time. Except as otherwise required by law, each person or entity to whom a duty or responsibility has been delegated shall be responsible for the exercise of such duty or responsibility and shall not be responsible for any act or failure to act of any other person or entity. Section 9.5. Indemnification. The Administrator (if an employee of the Company or any other entity affiliated with the Company), the present and former members of the Committee and the present and former members of the Boards of Directors of the Company shall be indemnified by the Company against any and all liabilities arising by reason of any act or failure to act made in good faith in accordance with the provisions of the Plan. For this purpose, liabilities include expenses reasonably incurred in the defense of any claim relating to the Plan. Section 9.6. Reports and Records. The Committee and those to whom the Committee has delegated duties under the Plan shall keep records of all their proceedings and actions and shall maintain books of account, records and other data as shall be necessary for the proper administration of the Plan and for compliance with applicable law. Section 9.7. Information to be Furnished to Committee. The Company shall furnish the Committee such data and information as it may require. The records of the Company shall be determinative of each Participant's period of employment, termination of employment and the reason therefor, leave of absence, reemployment, years of service, personal data and deferrals. Participants and their beneficiaries shall furnish to the Committee such evidence, data or information, and shall execute such documents, as the Committee reasonably requests. PAGE 21 ARTICLE 10. AMENDMENTS AND TERMINATION Section 10.1. Amendments. The Board of Directors of the Company may amend the Plan, in full or in part, at any time. Section 10.2. Termination. The Company expects the Plan to be permanent, but it necessarily must and does reserve the right to modify, revise or terminate the Plan at any time by action of the Board of Directors of the Company. Subject to the final sentence of this Section 10.2, in the event the Plan is terminated, benefits will be paid at the same time and in the same manner as would have occurred absent such termination, and the Committee and the Administrator shall continue to administer the terminated Plan for such purposes. Notwithstanding the preceding sentence, the Committee, in its sole discretion, may commence the payment of Plan benefits to Participants in a lump sum or annual installments as previously elected by the Participants any time after the Plan is terminated (even if the scheduled deferral periods of such individuals have not yet ended). ARTICLE 11. MISCELLANEOUS Section 11.1. No Guarantee of Employment. The adoption and maintenance of the Plan shall not be deemed to be a contract of employment between the Company and any employee. Nothing contained in the Plan shall give any Participant or other employee the right to be retained in the employ of the Company or to interfere with the right of the Company to discharge any employee at any time, nor shall it give the Company the right to require any Participant or other employee to remain in its employ or to interfere with any Participant's or other employee's right to terminate his or her employment at any time. Section 11.2. Non-Alienation. No benefit payable at any time under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment or encumbrance of any kind. Section 11.3. Severability. If any provision of the Plan shall be found to be invalid or unenforceable by a court of competent jurisdiction, the validity or enforceability of the remaining provisions of the Plan shall remain in full force and effect. Section 11.4. Applicable Law. The Plan and all rights under the Plan shall be governed by and construed according to the laws of the State of Illinois, except to the extent preempted by federal law. Section 11.5. Prior Deferral Plans. The deferred compensation arrangement in existence at the adoption of this Plan shall be incorporated into this Plan from the Effective Date. IN WITNESS WHEREOF, USFreightways Corporation has caused this Plan to be executed by its duly authorized officer on this day of , 1998. USFREIGHTWAYS CORPORATION By: /s/ Christopher L. Ellis ------------------------ Christopher L. Ellis Its: Senior Vice President, Finance and CFO EX-13 2 EXHIBIT 13 PAGE F1 Financial Highlights (Thousands of dollars, except per share amounts)
Fiscal Year 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Revenue LTL Trucking $ 1,540,162 $ 1,409,086 $ 1,213,360 TL Trucking 12,877 - - Logistics 130,323 106,299 85,601 Freight Forwarding 151,531 44,340 8,400 Corporate and other - 5,524 5,611 - --------------------------------------------------------------------------------------------------------------------------- Total Revenue $ 1,834,893 $ 1,565,249 $ 1,330,972 - --------------------------------------------------------------------------------------------------------------------------- Income from Operations (loss) LTL Trucking $ 127,242 $ 103,150 $ 67,876 TL Trucking 1,138 - - Logistics 7,976 6,414 2,655 Freight Forwarding 4,925 1,289 33 Corporate and other (11,848) (5,843) (3,436) - --------------------------------------------------------------------------------------------------------------------------- Total Income from Operations $ 129,433 $ 105,010 $ 67,128 - --------------------------------------------------------------------------------------------------------------------------- Net Interest Expense $ 8,027 $ 7,423 $ 11,495 - --------------------------------------------------------------------------------------------------------------------------- Net Income $ 71,445 $ 56,581 $ 31,478 - --------------------------------------------------------------------------------------------------------------------------- Net Income Per Share - Diluted $ 2.70 $ 2.19 $ 1.40 - --------------------------------------------------------------------------------------------------------------------------- Total Assets $ 974,673 $ 799,535 $ 688,508 - --------------------------------------------------------------------------------------------------------------------------- Return on Average Stockholders' Equity 16.8% 17.1% 12.5% - --------------------------------------------------------------------------------------------------------------------------
PAGE F2 Management's Discussion and Analysis of Financial Conditions and Results of Operations USFreightways Corporation ("the Company") is a full service provider of transportation services and innovative logistics solutions. This is accomplished through the Company's operating subsidiaries. Regional less-than-truckload ("LTL") general commodities carriers provide overnight and second-day delivery throughout the United States and into Canada. Logistics subsidiaries provide solutions to customers' logistics and distribution requirements. The Company also provides domestic and international freight forwarding as well as premium regional and national truckload service. Principal subsidiaries in the Regional LTL group are USF Holland Inc. ("Holland"), USF Bestway Inc. ("Bestway"), USF Red Star Inc. ("Red Star"), USF Reddaway Inc. ("Reddaway") and USF Dugan Inc. ("Dugan"); the Logistics group consists of USF Logistics Inc. ("Logistics") and USF Distribution Services Inc. ("Distribution Services"); the Freight Forwarding group includes USF Seko Worldwide Inc. ("Seko Worldwide"), Golden Eagle Group ("Golden Eagle"); Glen Moore Transport Inc. ("Glen Moore") is the Company's truckload carrier. Results of Operations In 1998, the Company changed its fiscal year-end to December 31st. In prior years, the fiscal year ended on the Saturday nearest December 31st. The year ending December 31, 1998 ("Fiscal 1998") included 52 weeks whereas ("Fiscal 1997") included 53 weeks ending on January 3, 1998 and ("Fiscal 1996") included 52 weeks ending on December 28, 1996. Operating revenue of the Company for Fiscal 1998 was a record $1.84 billion, a 17.2% increase over total operating revenue of $1.56 billion for Fiscal 1997. Income from operations increased by 23.3% from $105.0 million in Fiscal 1997 to a record $129.4 million in Fiscal 1998. Net income per share increased by 23.3% to $2.70 (diluted) in Fiscal 1998 compared to $2.19 (diluted) in Fiscal 1997. The extra 53rd week of Fiscal 1997 contributed approximately $20.6 million of revenue, but net income was adversely affected by approximately $0.04 per share as that week included the New Year's holiday. Fiscal 1997 operating revenue increased by 17.6% to $1.56 billion compared to $1.33 billion for Fiscal 1996. Income from operations increased by 56.4% to $ 105.0 million in Fiscal 1997 from $ 67.1 million (which included a $4.0 million restructuring charge at Red Star) in Fiscal 1996. Net income per share increased to by 56.4% to $2.19 (diluted) in Fiscal 1997 compared to $1.40 (diluted) in Fiscal 1996. Regional LTL. Revenue in the LTL group for the 52-week period in Fiscal 1998 increased by 9.3% to $1.54 billion from $1.41 billion in the 53 week Fiscal 1997. In Fiscal 1998, revenue from the LTL group amounted to 83.9% of the Company's operating revenue compared to 90.0% in Fiscal 1997. For comparable 52 week periods, LTL revenue increased 10.7%, LTL shipments increased 6.0%, LTL tonnage increased 8.4% and LTL revenue per hundredweight increased 2.1%. In Fiscal 1998, the LTL group enacted a general rate increase of approximately 5.9% in January and another general rate increase of approximately 5.9% in the late fall. The LTL group enacted a 5.9% general rate increase in January 1997 also. General rate increases apply to approximately 50% of the LTL group's revenue base. The remaining 50% of the revenue base is subject to contractual agreements which normally result in lower rate increases. Operating income in Fiscal 1998 increased by 23.4% to $127.2 million from $103.1 million in Fiscal 1997. Improvements in operating results were directly attributable to price stability, a modest improvement in the US economy, increases in market share and a continuing emphasis on cost reduction. The LTL group improved its ratio of operating expenses compared to operating revenue (operating ratio) to 91.7% compared to 92.7% in Fiscal 1997. Purchased transportation decreased to 3.2% of operating revenue from 3.5% in Fiscal 1997 as Dugan improved linehaul efficiencies and relied less on cartage agents and broker teams to handle its freight and Holland significantly reduced short term equipment rents. Fuel expenses were 3.4% of Fiscal 1998 revenue compared to 3.8% of Fiscal 1997 revenue primarily due to lower prices in Fiscal 1998. PAGE F3 Revenue in the LTL group increased by 14.4% to $1.41 billion in Fiscal 1997, a 53-week period, from $1.23 billion in Fiscal 1996, a 52-week period, primarily as a result of new customers, closure of certain competitors and expanded business from existing customers. In Fiscal 1997, LTL shipments increased by 10.9%, LTL tonnage increased by 12.1%, LTL revenue per shipment increased by 3.4% and LTL revenue per hundredweight increased by 2.4% compared to Fiscal 1996. In Fiscal 1996, revenue from the LTL group amounted to 92.5% of the Company's operating revenue. Operating income for the LTL group in Fiscal 1997 increased by 52.0% to $103.1 million from $67.9 million in Fiscal 1996 with an improvement in its operating ratio to 92.7% compared to 94.5% in Fiscal 1996. Fiscal 1996 operating income included a one-time $4.0 million restructuring charge at Red Star. Before this charge, the operating ratio for the LTL group was 94.2%. Improvements in operating income were directly attributable to a relatively mild winter in Fiscal 1997, price stability, and a strong economy, unlike Fiscal 1996 which was adversely impacted by severe weather during the winter months, intense industry competitive pricing and a somewhat sluggish economy during the first half of the year. The LTL group's salaries, wages and benefits improved to 63.7% of revenue from 64.2% in Fiscal 1996 as Bestway reduced workers' compensation expenses due to fewer claims. Additionally, a turnaround achieved at Red Star during the fourth quarter of Fiscal 1996, following its restructuring, continued through Fiscal 1997. Red Star, through stricter cost controls, improved its Fiscal 1997 operating ratio to 99.6% from 102.0% (104.1% including the restructuring charge) in Fiscal 1996. Fuel expenses, net of a fuel surcharge, were 3.8% of Fiscal 1997 revenue compared to 4.2% of Fiscal 1996 revenue due to lower prices in the latter part of Fiscal 1997. Revenue equipment rentals, operating taxes and terminal rental expenses collectively improved, as a percentage of revenue, to 5.0% in Fiscal 1997 compared to 5.4% in Fiscal 1996. Approximately 80% of Holland's and Red Star's employees are members of the Teamsters' union and are subject to a collective bargaining agreement. In 1998, the Teamsters ratified a five-year agreement that expires at the end of March 2003. This agreement provided for, among other things, customary increases in wages, pension and health benefits. Truckload. The Company's truckload carrier, Glen Moore (acquired on August 31, 1998), contributed $12.9 million in revenue and its operating ratio was 91.2% generating $1.1 million in operating profits. Glen Moore is a Pennsylvania based carrier that operates in both regional and nationwide markets with annualized revenue in Fiscal 1998 of approximately $35 million and operates 236 sleeper tractors and 625 trailers. Truckload operations accounted for 0.7% of the Company's Fiscal 1998 operating revenue. Logistics. Revenue in the Logistics group, comprised of dedicated carriage, assembly and distribution, supply chain management and contractual warehousing revenue, increased by $24.0 million (a 22.6% increase) to $130.3 million in Fiscal 1998 compared to $106.3 million in Fiscal 1997. Assembly and distribution revenue increased in Fiscal 1998 from Fiscal 1997 primarily through growth at existing distribution centers coupled with revenue from a new distribution center in Atlanta, along with revenue obtained since October 1998 from the acquisition of Moore and Son, a Columbus, Ohio based assembly and distribution business. Moore & Son contributed approximately $3.8 million in revenue since its acquisition. Contractual and warehousing revenue increased in Fiscal 1998 from Fiscal 1997 primarily through the addition of new customers and expanded business with existing customers. In Fiscal 1998, the Logistics group accounted for 7.1% of the Company's operating revenue compared to 6.8% of Fiscal 1997 revenue. Operating income for the group increased by 24.4% to $8.0 million from $6.4 million in Fiscal 1997. The group's operating ratio improved slightly to 93.9% in Fiscal 1998 from 94.0% in Fiscal 1997. Revenue in the Logistics group increased 24.2% to $106.3 million in Fiscal 1997 compared to $85.6 million in Fiscal 1996 primarily due to the addition of new contractual customers and a full year of revenue at Interamerican, a warehousing company that was acquired in July 1996. In Fiscal 1996, the Logistics group accounted for 6.4% of the Company's operating revenue. Operating income for the group increased by 141.6% to $6.4 million from $2.7 million in Fiscal 1996 due primarily to a full year of profits at Interamerican. The group's operating ratio improved 94.0% in Fiscal 1997 from 96.9% in Fiscal 1996. PAGE F4 Freight Forwarding. Revenue in the Freight Forwarding group increased by $107.2 million (a 242% increase) to $151.5 million from $44.3 million in Fiscal 1997. The increase was derived primarily at Seko Worldwide, the Company's domestic and international freight forwarder that was acquired on September 30, 1997, which generated a full year of revenue in Fiscal 1998, compared to revenue generated only during the fourth quarter of Fiscal 1997. In addition, the Company acquired the Golden Eagle Group, a provider of international air and ocean freight forwarding and logistics services, on November 12, 1998. Golden Eagle contributed $9.8 million, since its acquisition, of the overall increase in the Freight Forwarding group's Fiscal 1998 revenue. Golden Eagle's revenue for 1997, while not included in the Company's Fiscal 1997 revenue, amounted to $84 million of which approximately 90% was international. The Freight Forwarding group accounted for 8.3% of the Company's Fiscal 1998 operating revenue compared to 2.8% of the Company's Fiscal 1997 operating revenue. Operating income increased to $4.9 million from $1.3 million in Fiscal 1997, with an operating ratio of 96.7% in Fiscal 1998 compared to 97.1% in Fiscal 1997. The highly variable cost structure of the non-asset based freight forwarding business results in relatively stable margins at various volumes of freight. Revenue in the Freight Forwarding group increased by $35.9 million to $44.3 million from $8.4 million in Fiscal 1996. Of this increase, Seko Worldwide alone generated $31.8 million in revenue since its acquisition in September 1997. The Freight Forwarding group accounted for 0.6% of the Company's Fiscal 1996 operating revenue. The group's operating income in Fiscal 1997 was $1.3 million with $1.1 million contributed by Seko Worldwide. This compares to an immaterial profit in Fiscal 1996. Interest Net interest expense for Fiscal 1998 amounted to $8.0 million compared to $7.4 million in Fiscal 1997. The principal debt of the Company is $100 million in notes that mature May 1, 2000 and bear interest of 6 5/8%. The average interest rate on the Company's bank debt for Fiscal 1998 was approximately 5.8% compared to 5.9% in Fiscal 1997. Average outstanding bank debt in Fiscal 1998 and Fiscal 1997 was $17 million and $8.9 million, respectively. Net interest expense for Fiscal 1996 amounted to $11.5 million. The average amount of outstanding bank debt in Fiscal 1996 was $81.5 million. Average outstanding bank debt decreased by approximately $69 million in February 1997 following the sale of approximately 3.1 million shares of common stock in a public offering. Liquidity and Capital Resources The Company generated $153.2 million in cash flow from operating activities during Fiscal 1998. Capital expenditures during the year amounted to $157.5 million, of which $74.3 million was for revenue equipment, $56.7 million for terminals and $26.5 million for other assets. In addition, the Company paid $42.1 million in cash for the acquisitions of Glen Moore, Moore and Son, Vallerie's Transportation Services, and the Golden Eagle Group. Capital expenditures for Fiscal 1997 amounted to $128.8 million plus $22.8 million in cash for the acquisitions of Seko Worldwide and Mercury Distribution, an LTL general commodities carrier located in the Northeast. In light of current business levels, management expects that capital expenditures during the year ending December 31, 1999 will approximate $170 million to $200 million, excluding acquisitions. The Company has a $200 million revolving credit facility with a syndicate of commercial banks. The facility expires in 2002 and allows up to $100 million for standby letters of credit to cover the Company's self-insurance program, and has optional pricing of interest rates, including LIBOR or Prime base rates. The facility has an annual fee and contains customary financial covenants including maintenance of minimum net worth and funded debt to cash flow. During 1998, all borrowings were drawn at LIBOR base rates, with a weighted average interest rate for the year of 5.8%, excluding fees charged on the facility. At December 31, 1998 the Company had borrowed $45 million and had $47 million in outstanding letters of credit under this facility. In addition to the revolving credit facility, the Company maintains three uncommitted lines of credit, which provide $40 million short-term funds at rates approximating LIBOR. These facilities are used in concert with a centralized cash management system to finance short-term working capital needs; thereby enabling the Company to maintain minimal cash balances. In management's opinion, cash flows from operating activities and funding from its revolving credit facilities are adequate to finance the Company's anticipated business activity in 1999. At December 31, 1998 the Company had commitments to purchase approximately $13.7 million in land and improvements, $23.8 million for transportation equipment and $1.8 million for other equipment. During 1998, the Company declared cash dividends of $9.8 million. PAGE F5 Other The Company uses underground storage tanks at certain terminal facilities and maintains a comprehensive policy of testing, upgrading, replacing or eliminating these tanks to protect the environment and comply with various Federal and state laws. Whenever any contamination is detected, the Company takes prompt remedial action to remove the contaminants. It is management's opinion that the total costs related to all known incidents have been provided for in the financial statements and management is not aware of any potential contamination incidents that would have a material effect on the results of the Company. Market Risk The Company is exposed to the impact of interest rate changes. The Company's exposure to changes in interest rates is limited to borrowings under a line of credit agreement which has variable interest rates tied to the LIBOR rate. The weighted average annual interest rates on borrowings under this credit agreement were 5.8% and 5.9% in Fiscal 1998 and 1997 respectively. In addition, the Company has $100 million of unsecured notes with a 6 5/8% fixed annual interest rate at December 31, 1998. The Company estimates that the carrying value of the notes approximated its market value at December 31, 1998. The Company has no hedging instruments. From time to time, the Company invests excess cash in overnight money market accounts. Year 2000 The Company has been and continues to address the universal situation commonly referred to as the "Year 2000 Problem". The "Year 2000 Problem" is related to the inability of certain computer systems, software and embedded technologies to properly recognize and process date-related information surrounding the Year 2000. In 1996, the Company initiated a comprehensive review of its computerized Information Technology (IT) to identify systems that could be affected by the Year 2000 problems and has implemented a plan to resolve the identified issues. The Year 2000 issues were analyzed by identifying and assessing all systems, software and embedded technologies, with business critical systems given a higher priority. The Company defines a system as business critical if a failure would cause a significant service disruption or could cause a material adverse effect on the Company's operations or financial results. As of December 31, 1998, the Company has remediated 91% of its business critical systems. Further testing and verification on all systems will continue throughout 1999. The Company has expended approximately $1 million as of December 31, 1998 to ensure Year 2000 compliance. The total cost to ensure Year 2000 compliance is estimated to be less than $2 million. The cost estimate is based on the Company's structure and those subsidiaries it owns at the present time. The acquisition of any additional operating entity may significantly impact the total cost as it has been estimated. Contingency plans are being developed for business critical systems. The Company has tested or will be testing for plan completeness and accuracy. Some contingency plans may require additional labor that may impact the Company's operating costs. The Company has been contacting business partners whose Year 2000 non-compliance could adversely affect the Company's operations, employees, or customers. The Company believes the most likely worst case scenario would be the failure of a material business partner to be Year 2000 compliant. Therefore, the Company will continue to work with and monitor the progress of its partners and formulate a contingency plan when the Company does not believe the business partner will be compliant. The Company's assessment of its Year 2000 issues involves some assumptions. These assumptions revolved primarily around the Year 2000 representation from third parties with which the Company has business relationships, and where the Company has not been able to independently verify these representations. PAGE F6 Independent Auditors' Report The Board of Directors and Stockholders, USFreightways Corporation: We have audited the accompanying consolidated balance sheets of USFreightways Corporation and subsidiaries as of December 31, 1998 and January 3, 1998 and the related consolidated statements of operations, stockholders' equity, and cash flows for the two years ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USFreightways Corporation and subsidiaries as of December 31, 1998 and January 3, 1998 and the results of their operations and their cash flows for the two years ended December 31, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP, Chicago, Illinois, January 19, 1999 The Board of Directors and Stockholders, USFreightways Corporation: We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows for the year ended December 28, 1996 of USFreightways Corporation and subsidiaries. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USFreightways Corporation and subsidiaries as of December 28, 1996 and the results of operations and cash flows for the year ended December 28, 1996, in conformity with generally accepted accounting principles. KPMG LLP, Chicago, Illinois, January 22, 1997 PAGE F7 Consolidated Balance Sheets Years ended December 31, 1998 and January 3, 1998 (Thousands of dollars)
December 31, January 3, 1998 1998 - --------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash $ 5,548 $ 6,471 Accounts receivable, less allowances of $11,159 and $10,067 218,942 187,554 Operating supplies and prepaid expenses 23,067 21,176 Deferred income taxes (note 4) 32,292 21,915 - --------------------------------------------------------------------------------------------------------------------------- Total current assets 279,849 237,116 Property and equipment: Land 74,933 56,542 Buildings and leasehold improvements 171,229 131,543 Equipment 649,867 563,732 Other 56,994 48,892 - --------------------------------------------------------------------------------------------------------------------------- 953,023 800,709 Less accumulated depreciation (408,741) (352,394) - --------------------------------------------------------------------------------------------------------------------------- Total property and equipment 544,282 448,315 Intangible assets, net of accumulated amortization of $25,717 and $21,424 140,201 104,407 Other assets 10,341 9,697 - --------------------------------------------------------------------------------------------------------------------------- $ 974,673 $ 799,535 Liabilities and Stockholders' Equity Current liabilities: Current debt (note 3) $ 10,660 $ 650 Accounts payable 78,757 62,895 Accrued salaries, wages and benefits 66,142 55,166 Accrued claims and other 70,017 61,059 Income taxes payable 3,301 1,944 - --------------------------------------------------------------------------------------------------------------------------- Total current liabilities 228,877 181,714 Long-term debt, less current maturities (note 3) 51,096 15,000 Notes payable (note 3) 100,000 100,000 Accrued claims and other 69,183 58,057 Deferred income taxes (note 4) 66,383 52,564 - --------------------------------------------------------------------------------------------------------------------------- 515,539 407,335 Stockholders' equity: Cumulative preferred stock, $0.01 par value per share: 20,000,000 authorized, none issued - - Common stock, $0.01 par value per share: 80,000,000 authorized, 26,289,344 and 26,080,459 issued 265 265 Paid in capital 253,542 251,224 Retained earnings 208,662 147,007 Treasury stock, 255,095 and 463,949 shares (3,335) (6,296) - --------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 459,134 392,200 - --------------------------------------------------------------------------------------------------------------------------- $ 974,673 $ 799,535
See accompanying notes to consolidated financial statements. PAGE F8 Consolidated Statements of Operations Fiscal years ended December 31, 1998, January 3, 1998 and December 28, 1996 (Thousands of dollars, except per share amounts)
Fiscal Year 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Operating revenue LTL Trucking $ 1,540,162 $ 1,409,086 $ 1,231,360 TL Trucking 12,877 - - Logistics 130,323 106,299 85,601 Freight Forwarding 151,531 44,340 8,400 Corporate and other - 5,524 5,611 - --------------------------------------------------------------------------------------------------------------------------- Total operating revenue 1,834,893 1,565,249 1,330,972 - --------------------------------------------------------------------------------------------------------------------------- Operating expenses LTL Trucking 1,412,920 1,305,936 1,163,484 TL Trucking 11,739 - - Logistics 122,347 99,885 82,946 Freight Forwarding 146,606 43,051 8,367 Corporate and other 11,848 11,367 9,047 - --------------------------------------------------------------------------------------------------------------------------- Total operating expenses 1,705,460 1,460,239 1,263,844 - --------------------------------------------------------------------------------------------------------------------------- Income from operations 129,433 105,010 67,128 - --------------------------------------------------------------------------------------------------------------------------- Non-operating income (expense): Interest expense (8,784) (8,461) (12,144) Interest income 757 1,038 649 Other, net 88 (92) (704) - --------------------------------------------------------------------------------------------------------------------------- Total non-operating expense (7,939) (7,515) (12,199) - --------------------------------------------------------------------------------------------------------------------------- Net income before income taxes 121,494 97,495 54,929 Income tax expense (note 4) (50,049) (40,914) (23,451) - --------------------------------------------------------------------------------------------------------------------------- Net income $ 71,445 $ 56,581 $ 31,478 - --------------------------------------------------------------------------------------------------------------------------- Average shares outstanding-basic 26,209,281 25,544,240 22,249,499 Average shares outstanding-diluted 26,495,714 25,830,674 22,451,280 Basic earnings per common share: $ 2.73 $ 2.21 $ 1.41 - --------------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share: $ 2.70 $ 2.19 $ 1.40 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. PAGE F9 Consolidated Statements of Stockholders' Equity Fiscal years ended December 31, 1998, January 3, 1998 and December 28, 1996 (Thousands of dollars)
Total Common Paid in Retained Treasury Stockholders' Stock Capital Earnings Stock Equity - --------------------------------------------------------------------------------------------------------------------------------- Balance December 30, 1995 $ 234 $ 176,378 $ 76,945 $ (20,405) $ 233,152 Net income - - 31,478 - 31,478 Dividends declared - - (8,315) - (8,315) Employee stock transactions and other - 3,891 - 9,054 12,945 - --------------------------------------------------------------------------------------------------------------------------- Balance December 28, 1996 $ 234 $ 180,269 $ 100,108 $ (11,351) $ 269,260 Net income - - 56,581 - 56,581 Dividends declared - - (9,682) - (9,682) Issuance of common stock 31 69,400 69,431 Employee stock transactions and other - 1,555 - 5,055 6,610 - --------------------------------------------------------------------------------------------------------------------------- Balance January 3, 1998 $ 265 $ 251,224 $ 147,007 $ (6,296) $ 392,200 Net income - - 71,445 - 71,445 Dividends declared - - (9,790) - (9,790) Employee stock transactions and other - 2,318 - 2,961 5,279 - --------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1998 $ 265 $ 253,542 $ 208,662 $ (3,335) $ 459,134 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. PAGE F10 Consolidated Statements of Cash Flows Fiscal years ended December 31, 1998, January 3, 1998, and December 28, 1996 (Thousands of dollars)
Fiscal Year 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income from continuing operations $ 71,445 $ 56,581 $ 31,478 Reconciliation to net cash provided by operating activities: Depreciation and amortization 78,015 70,140 62,591 Deferred taxes 3,442 6,569 3,298 Changes in assets and liabilities excluding acquisitions: Accounts receivable (14,423) (29,680) (39,767) Other current assets 238 (2,080) 455 Accounts payable 6,091 21,161 5,525 Accrued liabilities 17,632 23,317 21,923 Other, net (9,271) (8,950) 2,096 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 153,169 137,058 87,599 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (157,476) (128,809) (94,057) Proceeds from sale of property and equipment 10,457 12,887 4,246 Acquisitions (42,081) (22,756) (31,265) - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (189,100) (138,678) (121,076) - --------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Dividends paid (9,771) (9,357) (8,252) Net proceeds from sale of common stock - 69,431 - Proceeds from sale of treasury stock 5,279 6,610 3,445 Proceeds from long-term bank debt 95,000 15,000 41,000 Payments on long-term bank debt (55,500) (77,683) (333) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 35,008 4,001 35,860 - --------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (923) 2,381 2,383 Cash at beginning of year 6,471 4,090 1,707 - --------------------------------------------------------------------------------------------------------------------------- Cash at end of year $ 5,548 $ 6,471 $ 4,090 - --------------------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 8,753 $ 7,823 $ 11,715 Income taxes 44,558 32,389 18,105 Non-cash transactions: equity, notes issued and debt assumed in connection with acquisitions $ 24,298 $ 4,023 $ 9,500 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. PAGE F11 Notes to Consolidated Financial Statements (Thousands of dollars, except per share amounts) 1. Summary of Significant Accounting Policies - ---------------------------------------------------------------------------- Company Overview. USFreightways Corporation ("the Company") is a full service provider of transportation services and innovative logistics solutions. This is accomplished through the Company's operating subsidiaries. Regional less-than-truckload ("LTL") general commodities carriers provide overnight and second-day delivery throughout the United States and into Canada. Logistics subsidiaries provide solutions to customers' logistics and distribution requirements. The Company also provides domestic and international freight forwarding as well as premium regional and national truckload service. Basis of Presentation. The consolidated financial statements include the accounts of USFreightways and its wholly owned subsidiaries (the Company). The Company's operations are further discussed in periodic SEC filings. Intercompany balances and transactions have been eliminated. The Company's consolidated statements of operations for prior years have been reclassified to conform with the current presentation. For fiscal year 1998, the Company began reporting on a calendar year basis. Previously, the Company reported on a 52/53-week fiscal year basis concluding on the Saturday nearest to December 31. The three fiscal years covered in the consolidated financial statements ended on December 31, 1998, January 3, 1998, and December 28, 1996 (Fiscal 1998, 1997 and 1996 respectively). Revenue Recognition. Transportation revenue is recognized when freight is picked up from the customer, at which time the related estimated expenses of performing the total transportation services are accrued. Cash. The Company considers demand deposits and highly liquid investments purchased with original maturities of three months or less as cash. Property and equipment. Purchases of property and equipment are carried at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over periods ranging from three to twelve years for the majority of equipment and 30 years for buildings. Maintenance and repairs are charged to current operations, while expenditures that add to the life of the equipment are capitalized. When revenue equipment is traded, a gain or loss on the trade of the equipment is recognized. Intangible assets. These costs primarily represent goodwill which is amortized on a straight-line basis up to 40 years. The carrying value of goodwill is reviewed whenever events or changes in circumstances indicate that the carrying value may not be recoverable through projected undiscounted future operating cash flows. No reduction of the carrying value has been required for any year. Earnings Per Share. Basic earnings per share are calculated on income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share are calculated using earnings available to each share of common stock outstanding during the period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. Unexercised stock options, calculated under the treasury stock method, is the only reconciling item between the Company's basic and diluted weighted earnings per share. The number of options, included in the denominator, used to calculate diluted earnings per share are 286,433; 286,434 and 201,781 for fiscal years 1998, 1997 and 1996 respectively. Use of Estimates. Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. PAGE F12 2. Operating Leases - ---------------------------------------------------------------------------- The Company leases certain terminals, vehicles and data processing equipment under long-term lease agreements that expire in various years through 2011. The following is a schedule of future minimum rental payments on leases that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 1998. Fiscal Year Payments - ---------------------------------------------------------------------------- 1999 $ 15,910 2000 11,398 2001 7,002 2002 3,858 2003 2,208 Subsequent years 1,168 - ---------------------------------------------------------------------------- $ 41,544 Rental expense in the accompanying consolidated statements of operations for fiscal years 1998, 1997, and 1996 was $22,595, $21,863, and $20,396, respectively. 3. Long-Term Debt - ---------------------------------------------------------------------------- Long-term debt at December 31, 1998 and January 3, 1998 consists of the following: December 31, January 3, 1998 1998 - ---------------------------------------------------------------------------- Unsecured notes (a) $ 100,000 $ 100,000 Unsecured lines of credit (b) 55,150 15,650 Other (c) 6,606 - - ---------------------------------------------------------------------------- 161,756 115,650 Less current maturities 10,660 650 - ---------------------------------------------------------------------------- $ 151,096 $ 115,000 (a) Unsecured notes of $100,000 are payable on May 1, 2000 and bear interest at 6 5/8%, payable semi-annually. The notes are not subject to redemption prior to maturity and have no sinking fund requirements. Based upon the Company's incremental borrowing rates for similar types of borrowing arrangements, the fair value of the notes at December 31, 1998 was approximately $100,000. (b) The Company has a $200,000 revolving credit facility through a syndicate of commercial banks. The facility expires in 2002 and allows up to $100,000 for standby letters of credit to cover the Company's self-insurance program, and has optional pricing of interest rates, including LIBOR or Prime base rates. The facility has an annual fee and contains customary financial covenants including maintenance of minimum net worth and funded debt to cash flow. During Fiscal 1998, all borrowings were drawn at LIBOR base rates, with a weighted average interest rate for the year of 5.8%, excluding fees charged on the facility. At December 31, 1998 the Company had borrowed $45,150 and had $47,043 outstanding letters of credit under this facility. In addition to the revolving credit facility, the Company maintains three uncommitted lines of credit, which provide $40,000 short-term funds at rates approximating LIBOR. These facilities are used in concert with a centralized cash management system to finance short-term working capital needs; thereby enabling the Company to maintain minimal cash balances. (c) In August 1998, the Company acquired Glen Moore Transport, Inc. Glen Moore's headquarters in Carlisle, PA has a mortgage of $2,791 on the property that bears interest at 7.25% with a final payment due in July 2005. In addition, Glen Moore has loans payable totaling $3,815 on various pieces of revenue equipment that bear interest from 7.5% to 14.3% with a final payment due in June 2004. The aggregate annual maturities of debt at December 31, 1998 are as follows: Fiscal Year Amount - ---------------------------------------------------------------------------- 1999 $ 10,660 2000 102,528 2001 95 2002 45,365 2003 - 2004 596 2005 2,512 - ---------------------------------------------------------------------------- $ 161,756 PAGE F13 4. Income Taxes - ---------------------------------------------------------------------------- A reconciliation of the statutory Federal income tax rate with the effective income tax rate is as follows:
Fiscal Year: 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Federal income tax at statutory rate (35%) $ 42,523 $ 34,123 $ 19,225 State income tax 6,115 4,489 2,724 Goodwill amortization 1,363 955 823 Other 48 1,347 679 - --------------------------------------------------------------------------------------------------------------------------- Total income tax expense $ 50,049 $ 40,914 $ 23,451 - ---------------------------------------------------------------------------------------------------------------------------
The components of the provision for income taxes are as follows:
Fiscal Year: 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Current expense: Federal $ 36,814 $ 28,427 $ 15,610 State 8,106 5,918 4,543 - --------------------------------------------------------------------------------------------------------------------------- 44,920 34,345 20,153 - --------------------------------------------------------------------------------------------------------------------------- Deferred expense: Accelerated depreciation 10,043 9,099 8,555 Allowance for doubtful accounts and revenue adjustments (1,036) 3,798 (601) Insurance and claims (3,797) (4,659) (5,036) Vacation pay (1,254) (1,053) 597 Other 1,173 (616) (217) - --------------------------------------------------------------------------------------------------------------------------- 5,129 6,569 3,298 - --------------------------------------------------------------------------------------------------------------------------- Total income tax expense $ 50,049 $ 40,914 $ 23,451 - ---------------------------------------------------------------------------------------------------------------------------
The following is a summary of the components of the deferred tax assets and liabilities at December 31, 1998 and January 3, 1998:
December 31, January 3, 1998 1998 - --------------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Allowance for doubtful accounts and revenue adjustments $ 2,076 $ 1,027 Insurance and claims 34,751 30,953 Vacation pay 8,451 7,196 Other 7,261 3,872 - --------------------------------------------------------------------------------------------------------------------------- $ 52,539 $ 43,048 - --------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Property and equipment, principally due to accelerated depreciation $ 86,630 $ 73,697 - ---------------------------------------------------------------------------------------------------------------------------
PAGE F14 5. Employee Benefit Plans - ---------------------------------------------------------------------------- The Company maintains a salary deferral 401(k) plan covering substantially all employees who are not members of a collective bargaining unit and who meet specified service requirements. Contributions are based upon participants' salary deferrals and compensation and are made within Internal Revenue Service limitations. For the fiscal years 1998, 1997, and 1996, Company contributions for these plans were $8,290, $6,550, and $5,715, respectively. The Company does not offer post-employment or post-retirement benefits. The Company contributes to several union-sponsored multi-employer pension plans. These plans are not administered by the Company, and contributions are determined in accordance with provisions of negotiated labor contracts. The Multi-employer Pension Plan Amendments Act of 1980 established a continuing liability to such union-sponsored pension plans for an allocated share of each plan's unfunded vested benefits upon substantial or total withdrawal by the Company or upon termination of the pension plans. To date, no withdrawal or termination has occurred or is contemplated. For the fiscal years 1998, 1997, and 1996, Company contributions for these pension plans were $60,748, $54,041, and $45,094, respectively. 6. Common Stock - ---------------------------------------------------------------------------- The Company maintains an employee stock purchase plan which provides for the purchase of an aggregate of not more than 900,000 shares of the Company's common stock. Each eligible employee may designate the amount of regular payroll deductions, subject to a yearly maximum, that is used to purchase shares at 90% of the month-end market price. At December 31, 1998; 586,975 shares had been issued under this plan. The Company maintains stock option plans that provide for the granting of options to key employees and non-employee directors to purchase an aggregate of not more than 3,760,000 shares of the Company's common stock. Stock options issued pursuant to the plans are exercisable for periods up to 10 years from the date an option is granted. At December 31, 1998 there were 381,170 shares available for granting under the plans. In accordance with the provisions of SFAS No.123, the Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans, and accordingly, does not recognize compensation cost. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date, as prescribed by SFAS No.123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below:
Fiscal Year 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Net income - as reported $ 71,445 $ 56,581 $ 31,478 Net income - pro forma 69,736 55,808 31,049 Basic earnings per share - as reported 2.73 2.21 1.41 Basic earnings per share - pro forma 2.66 2.18 1.40 Diluted earnings per share - as reported 2.70 2.19 1.40 Diluted earnings per share - pro forma 2.63 2.16 1.38 - ---------------------------------------------------------------------------------------------------------------------------
As prescribed under SFAS No.123, pro forma net income amounts presented above reflect only options granted after January 1, 1995 since compensation costs for options granted prior to that date are not considered. Compensation cost for options granted since January 1, 1995 is reflected over the options' vesting periods ranging from two to five years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal years 1998, 1997, and 1996: dividend yield ranging from 1.27% to 1.58%; expected volatility ranging from 35.69% to 49.31%; risk-free interest rates at grant date ranging from 4.97% to 7.46%; and expected lives ranging from 5.61 to 6.40 years. PAGE F15 A summary of the status of the Company's stock option plans is presented below:
Fiscal Year 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - --------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 1,435,730 $ 23.67 1,107,250 $ 17.84 758,800 $ 16.21 Granted 1,550,000 25.10 623,500 29.93 479,000 19.49 Exercised (54,290) 16.73 (279,520) 14.98 (92,900) 13.65 Forfeited (203,450) 30.23 (15,500) 16.52 (37,650) 16.16 Outstanding at end of year 2,727,990 24.13 1,435,730 23.67 1,107,250 17.84 Options exercisable at year end 581,790 20.19 402,690 17.74 448,220 15.65 Weighted-average fair value of options granted during the year $ 11.66 $ 11.80 $ 8.18 - ----------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 1998:
Outstanding Options Options Exercisable - --------------------------------------------------------------------------------------------------------------------------- Weighted-Avg Number Remaining Number Range of Outstanding at Contractual Life Weighted-Avg Exercisable at Weighted-Avg Exercise Prices 12/31/98 (years) Exercise Price 12/31/98 Exercise Price - --------------------------------------------------------------------------------------------------------------------------- $ 13.00-15.00 143,950 3.78 $ 13.79 143,950 $ 13.79 18.25-19.63 463,000 7.50 19.48 229,600 19.33 22.50-24.94 1,722,540 9.42 24.72 133,540 22.83 25.00-30.50 273,500 8.91 29.92 54,700 29.92 31.81-35.00 125,000 8.97 32.45 20,000 31.81 2,727,990 8.72 24.13 581,790 20.19 - ---------------------------------------------------------------------------------------------------------------------------
PAGE F16 In February, 1994 the Board of Directors approved a stockholder rights plan designed to deter coercive takeover tactics and to prevent an acquiror from gaining control of the Company without offering a fair price to all of the Company's stockholders. At that time, the Company declared a distribution of one right for each share of common stock outstanding (effected as a stock dividend) to stockholders of record as of February 11, 1994 and generally to shares issuable under the Company's stock option plans. Each right entitles holders to buy one-hundredth (1/100) of a share of the Company's newly designated Series A Junior Participating Cumulative Preferred Stock, $0.01 par value per share, for a purchase price of $110.00. Each right is exercisable ten days after the acquisition of 15% or more of the Company's voting stock, or the commencement of a tender or exchange offer under which the offeror would own 19.9% or more of the Company's stock. In the event of a proposed takeover meeting certain additional conditions, the rights could be exercised by all holders other than the takeover bidder at an exercise price of half of the current market price of the Company's common stock. This would have the effect of significantly diluting the holdings of the takeover bidder. These rights expire on February 3, 2004. In February 1997, the Company sold 3,105,000 of its shares in a public offering. The net proceeds from the sale, amounting to approximately $69,000,000, were initially used to repay outstanding debt under the Company's revolving credit facility. 7. Commitments and Contingencies - ---------------------------------------------------------------------------- The Company is routinely involved in a number of legal proceedings and claims arising in the ordinary course of business, primarily involving claims for bodily injury and property damage incurred in the transportation of freight. The estimated liability for claims included in liabilities, both current and long-term, reflects the estimated ultimate cost of self-insured claims incurred, but not paid, for bodily injury, property damage, cargo loss and damage, and workers' compensation. In the opinion of management, the outcome of these matters is not expected to have any material adverse effect on the consolidated financial position or results of operations of the Company and have been adequately provided for in the financial statements. At December 31, 1998, the Company had capital purchase commitments of approximately $13,691 for land and improvements, $23,826 for transportation equipment, and $1,846 for other equipment. 8. Restructuring Charge - ---------------------------------------------------------------------------- During the fourth quarter 1996, management authorized a one-time restructuring charge at its USF Red Star subsidiary. The pre-tax restructuring charge of $4,050 relates primarily to ongoing lease commitments for terminals no longer occupied and severance paid in connection with the reduction of personnel. The Company anticipates that no additional charges against its future operations will be incurred as a result of the restructuring charge. The restructuring charge is included in the LTL group operating expenses. 9. Acquisitions - ---------------------------------------------------------------------------- During 1998, under the purchase method of accounting, the Company acquired all of the outstanding shares of Golden Eagle Group, Inc., an international freight forwarding company; Glen Moore Transport, Inc., a truckload freight carrier; Moore and Son Co., a transportation logistics services company; and the general commodities business of Vallerie's Transportation Service, Inc. for a total of $66,379 of cash and debt incurred. During 1997, under the purchase method of accounting, the Company acquired all of the outstanding shares of SEKO Worldwide, Inc., an airfreight forwarding company and the general commodities business of Mercury Distribution, Inc. for a total of $26,779 of cash and debt incurred. PAGE F17 10. Business Segments - ---------------------------------------------------------------------------- The Company has eight reportable segments: LTL trucking group (including five regional carriers), TL trucking, logistics, and freight forwarding. The LTL trucking group provides overnight and second-day delivery of general commodities throughout the United States and into Canada. The Company's TL subsidiary provides premium regional and national truckload services. The Company's logistics subsidiaries provide solutions to customers' logistics and distribution requirements. The Company's freight forwarding subsidiaries provide domestic and international air and ocean freight service through both exclusive and non-exclusive agents. The reportable segments are managed separately because each business has differing customer requirements, either as a result of the regional environment of the country or differences in products and services offered. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intangible assets are included in each segment's reportable assets, but the amortization of these intangible assets is not included in the determination of a segment's operating profit or loss. The Company evaluates performance based on profit or loss from operations before income taxes, interest, amortization of intangibles and other non-operating income (expenses). An immaterial amount of revenue is generated outside the United States.
Fiscal Year 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Revenue LTL Group: USF Holland $ 794,012 $ 711,137 $ 595,378 USF Reddaway 215,531 198,714 177,998 USF Red Star 212,365 194,823 196,399 USF Dugan 181,971 170,962 148,527 USF Bestway 136,283 133,450 113,058 - --------------------------------------------------------------------------------------------------------------------------- Sub total LTL Group 1,540,162 1,409,086 1,231,360 TL 12,877 - - Logistics 130,323 106,299 85,601 Freight forwarding 151,531 44,340 8,400 Corporate and other - 5,524 5,611 - --------------------------------------------------------------------------------------------------------------------------- Total Revenue $ 1,834,893 $ 1,565,249 $ 1,330,972 - --------------------------------------------------------------------------------------------------------------------------- Income From Operations LTL Group: USF Holland $ 82,580 $ 65,244 $ 51,362 USF Reddaway 18,909 13,457 9,262 USF Red Star 3,581 871 (7,999) USF Dugan 6,661 6,145 3,237 USF Bestway 15,511 17,433 12,014 - --------------------------------------------------------------------------------------------------------------------------- Sub total LTL Group 127,242 103,150 67,876 TL 1,138 - - Logistics 7,976 6,414 2,655 Freight forwarding 4,925 1,289 33 Corporate and other (7,555) (2,936) (959) Amortization of intangibles (4,293) (2,907) (2,477) - --------------------------------------------------------------------------------------------------------------------------- Total Income from Operations $ 129,433 $ 105,010 $ 67,128 - ---------------------------------------------------------------------------------------------------------------------------
PAGE F18
Fiscal Year 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Assets LTL Group: USF Holland $ 337,477 $ 276,810 $ 232,003 USF Reddaway 117,326 108,979 104,608 USF Red Star 146,431 137,336 133,014 USF Dugan 92,969 93,737 86,849 USF Bestway 65,815 64,266 54,287 - --------------------------------------------------------------------------------------------------------------------------- Sub total LTL Group 760,018 681,128 610,761 TL 32,680 - - Logistics 70,588 59,458 62,753 Freight forwarding 97,326 52,232 2,080 Corporate and other 14,061 6,717 12,914 - --------------------------------------------------------------------------------------------------------------------------- Total Assets $ 974,673 $ 799,535 $ 688,508 - --------------------------------------------------------------------------------------------------------------------------- Fiscal Year 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Long Lived Asset Expenditures LTL Group: USF Holland $ 83,908 $ 66,637 $ 43,504 USF Reddaway 21,105 19,421 14,865 USF Red Star 16,358 10,439 1,755 USF Dugan 13,707 18,134 9,070 USF Bestway 9,134 8,463 6,978 - --------------------------------------------------------------------------------------------------------------------------- Sub total LTL Group 144,212 123,094 76,172 TL 1,844 - - Logistics 9,830 4,799 13,573 Freight forwarding 669 280 107 Corporate and other 921 636 4,205 - --------------------------------------------------------------------------------------------------------------------------- Total Long Lived Asset Expenditures $ 157,476 $ 128,809 $ 94,057 - --------------------------------------------------------------------------------------------------------------------------- Depreciation Expense LTL Group: USF Holland $ 30,565 $ 27,603 $ 22,612 USF Reddaway 11,267 9,927 8,398 USF Red Star 7,987 7,269 7,832 USF Dugan 10,458 9,887 9,900 USF Bestway 4,723 4,802 4,383 - --------------------------------------------------------------------------------------------------------------------------- Sub total LTL Group 65,000 59,488 53,125 TL 1,016 - - Logistics 6,352 5,678 4,711 Freight forwarding 842 277 67 Corporate and other 512 1,790 2,211 - --------------------------------------------------------------------------------------------------------------------------- Total Depreciation Expense $ 73,722 $ 67,233 $ 60,114 - ---------------------------------------------------------------------------------------------------------------------------
PAGE F19 11. Quarterly Financial Information (unaudited) Quarters First Second Third Fourth Total - --------------------------------------------------------------------------------------------------------------------------- Fiscal 1998 Operating revenue $ 442,339 $ 447,026 $ 469,349 $ 476,179 $ 1,834,893 Income from Operations 25,723 32,448 34,851 36,411 129,433 Net income 13,729 18,044 19,504 20,168 71,445 Net income per share - basic 0.53 0.69 0.74 0.77 2.73 Net income per share - diluted 0.52 0.68 0.74 0.76 2.70 Dividends declared per share 0.0933 0.0933 0.0933 0.0933 .3733 Market price per share (calendar quarter) 32.37-39.50 28.37-37.12 18.44-32.62 17.87-30.12 17.87-39.50 Fiscal 1997 Operating revenue $ 355,817 $ 380,763 $ 393,462 $ 435,207 $ 1,565,249 Income from Operations 19,071 26,915 31,905 27,119 105,010 Net income 9,750 14,541 17,542 14,748 56,581 Net income per share - basic 0.40 0.56 0.68 0.57 2.21 Net income per share - diluted 0.40 0.56 0.67 0.56 2.19 Dividends declared per share 0.0933 0.0933 0.0933 0.0933 .3733 Market price per share (calendar quarter) 22.87-28.00 23.12-29.00 25.75-34.50 29.37-36.75 22.87-36.75 - ---------------------------------------------------------------------------------------------------------------------------
PAGE F20 Selected Consolidated Financial Data (Thousands of dollars, except per share amounts)
Fiscal Year 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Statements of Operations Operating revenue $ 1,834,893 $ 1,565,249 $ 1,330,972 $ 1,144,458 $ 1,016,464 Income from operations 129,433 105,010 67,128(1) 67,543 69,666 Interest expense, net (8,027) (7,423) (11,495) (8,177) (8,417) Other non-operating income (expense) 88 (92) (704) (878) (2,011) - --------------------------------------------------------------------------------------------------------------------------- Net income from operations before income taxes 121,494 97,495 54,929 58,488 59,238 Income tax expense (50,049) (40,914) (23,451) (25,150) (25,882) - --------------------------------------------------------------------------------------------------------------------------- Net income from operations 71,445 56,581 31,478 33,338 33,356 Extraordinary item - operating rights - - - - (1,291) - ---------------------------------------------------------------------------------------------------------------- Director Net income $ 71,445 $ 56,581 $ 31,478(1) $ 33,338 $ 32,065 - --------------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share Net income per share from operations $ 2.73 $ 2.21 $ 1.41(1) $ 1.52 $ 1.53 Net income per share 2.73 2.21 1.41(1) 1.52 1.47 Diluted Earnings Per Share Net income per share from operations $ 2.70 $ 2.19 $ 1.40(1) $ 1.51 $ 1.51 Net income per share 2.70 2.19 1.40(1) 1.51 1.45 Cash dividends declared per share $ 0.37 $ 0.37 $ 0.37 $ 0.37 $ 0.37 Operating Statistics LTL Trucking Companies (in thousands) Total tons 9,179 8,579 7,732 6,835 6,210 Total shipments 13,468 12,857 11,590 10,187 9,045 Balance Sheets Assets: Current assets $ 279,849 $ 237,116 $ 203,577 $ 158,611 $ 144,615 Property and equipment, net 544,282 448,315 395,500 338,846 272,264 Intangible assets, net 140,201 104,407 79,559 69,918 72,194 Other assets 10,341 9,697 9,872 10,819 11,929 - --------------------------------------------------------------------------------------------------------------------------- Total assets $ 974,673 $ 799,535 $ 688,508 $ 578,194 $ 501,002 - --------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity: Current liabilities $ 228,877 $ 181,714 $ 144,348 $ 128,484 $ 118,447 Long-term debt 151,096 115,000 178,000 137,333 105,667 Other non-current liabilities 135,566 110,621 96,900 79,225 68,794 Total stockholders' equity 459,134 392,200 269,260 233,152 208,094 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 974,673 $ 799,535 $ 688,508 $ 578,194 $ 501,002 - ---------------------------------------------------------------------------------------------------------------------------
(1) Income from operations, net income and earnings per share include the Red Star restructuring charge of $4,050, before income tax, equivalent to $0.10 per share, net of tax.
PAGE F21 STATISTICAL INFORMATION Operating Operating LTL Tons LTL Terminals Tractors Trailers Employees Revenue Ratio Shipments YR. (million) (thousands) (thousands) -- --------- --------- ----------- ----------- --------- -------- -------- --------- Holland 98 $794.0 89.6% 4,163.9 6,599.1 55 3,645 6,299 8,058 97 $711.1 90.8% 3,826.9 6,163.6 51 3,448 5,998 7,322 Red Star 98 $212.4 98.3% 961.4 1,986.2 27 995 2,231 2,232 97 $194.8 99.6% 898.0 1,887.4 26 1,007 2,190 2,108 Reddaway 98 $215.5 91.2% 858.6 1,766.3 56 1,084 2,956 2,485 97 $198.7 93.2% 810.4 1,745.1 55 1,064 2,781 2,369 Bestway 98 $136.3 88.6% 641.7 1,208.9 26 639 2,314 1,472 97 $133.5 86.9% 630.8 1,211.1 26 590 2,142 1,439 Dugan 98 $182.0 96.3% 914.9 1,686.3 61 1,008 2,985 2,107 97 $171.0 96.4% 877.4 1,642.3 59 961 2,924 2,056 Logistics 98 $130.3 93.9% NA NA NA 514 1,280 1,829 97 $106.3 94.0% NA NA NA 491 1,163 1,534 Seko 98 $151.5 96.7% NA NA NA NA NA 520 97 $ 31.8 96.5% NA NA NA NA NA 148 Glen Moore 98 $ 12.9 91.2% NA NA 1 236 625 383
EX-21 3 EXHIBIT 21 USFREIGHTWAYS CORPORATION SIGNIFICANT SUBSIDIARIES OF THE COMPANY Parent and Significant Subsidiaries State of Incorporation UFFreightways Corporation Delaware USF Bestway Inc. Arizona USF Dugan Inc. Kansas USF Holland Inc. Michigan USF Red Star Inc. New York USF Reddaway Inc. Oregon USF Logistics Inc. Illinois USF Distribution Services Inc. Illinois USF Coast Consolidators Inc. California USF Caribbean Services Inc. Delaware USF Sales Corporation Delaware USF Seko Wordwide Inc. Illinois Glen Moore Transport Inc. Pennsylvania USF Golden Eagle Group Inc. Delaware EX-23 4 EXHIBIT 23 EXHIBIT 23 Consent of KPMG LLP The Board of Directors USFreightways Corporation We consent to incorporation by reference in Registration Statements on Form S-8 (Nos. 33-57634, 33-58290, 33-63628, 33-79160, 333-28357)of USFreightways Corporation of our report dated January 22, 1997 relating to the consolidated statements of operations, stockholders' equity and cash flows of USFreightways Corporation and subsidiaries for the year ended December 28, 1996 and the related financial statement schedule, which report appears in or is incorporated by reference in the December 31, 1998 annual report on Form 10-K of USFreightways Corporation. /s/ KPMG LLP Chicago, Illinois March 30, 1999 EX-24 5 EXHIBIT 24 EXHIBIT 24 USFREIGHTWAYS CORPORATION POWER OF ATTORNEY The undersigned hereby constitutes and appoints Christopher L. Ellis, Robert S. Owen and Richard C. Pagano, or each of them, my true and lawful attorneys-in- fact and agents, with full power of substitution, to execute on my behalf, individually and in all capacities as an officer or director of USFreighways Corporation, an Annual Report on Form 10-K, and all amendments thereto for the year ended December 31, 1998, and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys- in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done to comply with all requirements of the Securities and Exchange Commission, as fully and to all intents and purposes as each might or could do in person, and the undersigned hereby ratifies and confirms each act that said attorneys-in- fact and agents may lawfully do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has executed this power of attorney on the 10th day of March, 1999. Signatures Title ---------- ----- /s/ John Campbell Carruth Chairman of the Board, Chief _____________________ Executive Officer and Director John Campbell Carruth /s/ Robert V. Delaney Director ----------------- Robert V. Delaney /s/ Morley Koffman Director -------------- Morley Koffman /s/ Robert P. Neuschel Director ------------------ Robert P. Neuschel /s/ Anthony J. Paoni ---------------- Anthony J. Paoni /s/ John W. Puth Director ------------ John W. Puth /s/ Neil A. Springer Director ---------------- Neil A. Springer /s/ William N. Weaver, Jr. Director ---------------------- William N. Weaver, Jr. EX-27 6 FINANCIAL DATA SCHEDULE
5 0000881791 USFreightays Corp. 1000 YEAR DEC-31-1998 DEC-31-1998 5,548 0 218,942 0 0 279,849 544,282 0 974,673 228,877 0 0 0 0 459,134 974,673 0 1,834,893 0 1,705,460 0 0 8,784 121,494 50,049 71,445 0 0 0 71,445 2.73 2.70
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